Does a dividend really make Alphabet stock more attractive?

Google parent Alphabet announced this week it plans to pay its first ever dividend. Our writer gives his take on what it may mean for the stock.

| More on:
Google office headquarters

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The US market reacted positively this week to news that Google and YouTube owner Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) finally plans to start paying a dividend. It suggests that investors see the move as positive. But does it really make Alphabet stock more attractive – or could it suggest the end of the company’s golden growth years?

More cash than great growth ideas?

When a company generates a lot of spare cash it can invest it in continued growth, spend it on dividends, sit on it for a rainy day — or a combination of those.

Alphabet is hugely cash generative. It has invested a lot in new product and service development, but has still been hoarding cash for years. It ended its most recent quarter with $111bn in cash, cash equivalents, and marketable securities.

In the latest quarter alone, the company had free cash flows of $17bn.

With its huge customer base, service ecosystem and low marginal costs in adding more customers, Alphabet is a free cash flow machine.

Source: TradingView

The initial quarterly dividend, 20c per share, is modest. That represents an annual dividend yield of well under 1%.

But could it suggest that the company now lacks sufficiently compelling business growth ideas on which to spend all of its spare cash?

Fine tuning a proven business model

I think it could. But that is not necessarily bad for Alphabet stock. The company generates so much cash it can easily pay a dividend and also continue investing substantially in growth.

In the latest quarter, revenues grew 15% compared to the same period last year. Alphabet has an outstanding track record of revenue growth. I see no reason that cannot continue, even once it starts spending money on dividends.

Source: TradingView

In that sense, I do not think a dividend fundamentally changes the Alphabet investment case. Arguably, it makes it more attractive, as not only will the share now attract income investors, but the move also shows management is thinking about shareholders’ interests.

Long-term momentum shifts

Then again, look at Apple (NASDAQ: AAPL). It brought back its dividend in 2012 after many years not paying one. Since then, the dividend has grown steadily. But, last year, both revenues and income at the tech giant were weaker than the prior year.

Still, Apple stock is up 4% over the past year – and 232% over the past five years.

That is a markedly better performance than the (very impressive) 148% gain recorded by Alphabet stock over the past five years (this chart shows Apple in blue and Alphabet in orange).

Although income fell last year, Apple using some of its spare cash to buy back shares means its basic earnings per share continued (just) to grow.

Source: TradingView

Alphabet has massive competitive advantages, from its proprietary technology to a vast user base. It does face challenges, such as competitors leading it on AI, eating into both revenues and profits for Alphabet.

Over time though, I expect it to continue generating huge cash flows. Paying a dividend need not slow its growth. I see it as either neutral or positive for the investment case.

That said, Alphabet stock’s price-to-earnings ratio of around 30 is higher than I am comfortable with, so I have no plans to invest.

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.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Alphabet 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.

More on Investing Articles

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

Nvidia stock is becoming more affordable!

Nvidia stock is up 2,500% over five years, but the chip giant’s share split -- announced during its earnings report…

Read more »

Investing Articles

Are Rolls-Royce shares good for passive income?

Our writer is getting mixed messages about the Rolls-Royce dividend. But whatever happens, he thinks passive income hunters will be…

Read more »

Investing Articles

Could the Rolls-Royce share price end 2024 above £5?

As the Rolls-Royce share price continues its remarkable run, our writer considers where it might be at the end of…

Read more »

Investing Articles

UK stocks are hitting all-time highs! Yet these 2 still look cheap to me

The FTSE 100's on a roll. But it's still possible to pick bargain UK stocks, provided we know where to…

Read more »

Satellite on planet background
Investing Articles

At just under £14, can BAE Systems’ share price still be a prime FTSE 100 bargain? 

Despite its bullish price run, BAE Systems’ share price still looks undervalued to me and appears set for strong growth.

Read more »

Photo of a man going through financial problems
Investing Articles

2 dividend shares I’d avoid like the plague in today’s stock market

The UK stock market is full of high-yield dividend shares that could equate to a steady stream of passive income.…

Read more »

Abstract bull climbing indicators on stock chart
Investing Articles

£17,000 in savings? Here’s how I’d aim to turn that into a £29,548 annual second income!

Generating a sizeable second income can be life-enhancing and can be done from relatively small investments in high-dividend-paying stocks.

Read more »

Investing Articles

With as little as £300 a month invested, this stock could net £16,000 a year in passive income

Putting a few hundred pounds each month into the stock market could eventually generate a five-figure annual passive income, this…

Read more »