Could an Alphabet dividend be on the way?

Christopher Ruane likes the long-term growth prospects for the owner of Google. But can he expect an Alphabet dividend any time soon?

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As a shareholder in Google parent Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), I like the strong cash flows that the company throws off. But, at some point, I wonder whether a shareholder like me might be able to make better use of them than the tech giant. So, could an Alphabet dividend be on the cards in coming years?

To pay or not to pay

When a company generates spare cash it can invest it in the business, or pay it out to shareholders as dividends.

Many tech companies start by not paying dividends. Alphabet is an example, as is Amazon. Others go for years without paying a dividend before changing tack and making regular shareholder payouts. Apple is an example.

In any case, Alphabet keeping money to grow its business has made sense while it has huge growth opportunities.

But the thing is that Alphabet does not really need all that money. Indeed, that is why rather than reinvesting it all in the business, it has already been using some of it to buy back shares.

That is on a big scale: the company announced yesterday that it plans to spend another $70bn on upcoming buybacks.

Dividend prospects

If it has that much spare cash floating around, could we see an Alphabet dividend?

I think the answer is yes. Companies sometimes prefer buybacks as they help improve earnings per share even when total profits are flat. But many shareholders like dividends and paying one can improve sentiment towards a share, potentially boosting its price.

Alphabet is a moneymaking machine. Net income in the first quarter fell 8% compared to the same period last year, but still came in at $15.1bn. Job cuts could lead to higher profits, while the risk of an advertising downturn hurting earnings did not seem to materialise strongly in the quarter’s earnings. Net cash flows from operating activities fell 6% year on year to $23.5bn.

Those are huge numbers.

Alphabet shares have fallen 11% in the past year on fears that AI could eat into revenues and profits at the core search business. But I do not think that risk showed through strongly in the results. Meanwhile, non-search businesses like Google Cloud continue to gain traction, with that division reporting 28% revenue growth.

If the share price rises, buying back shares may be less economically attractive for the company. An Alphabet dividend could make more sense as a way to distribute excess cash to shareholders.

Long-term hold

However, I do not know when that might happen. For now, at least, management seems content not to pay a dividend.

Yet if a rising share price means buybacks offer poorer value for the company, I think that could change. At some point in the next three to five years, I expect management will need to engage seriously with the prospect of introducing an Alphabet dividend.

Whether that happens remains to be seen. But I continue to like Alphabet’s strong brand, large customer base, competitive advantage and attractive valuation. I plan to hold my Alphabet shares for the foreseeable future.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. C Ruane has positions in Alphabet. The Motley Fool UK has recommended Alphabet, Amazon.com, and Apple. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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