Updated on November 5th, 2020 by Nate Parsh
Income investors can find quality dividend stocks from a wide range of market sectors, such as health care, utilities, and consumer staples. However, the technology sector still includes many large-cap stocks that do not pay dividends to shareholders.
Alphabet (GOOG) (GOOGL) is one of the ~90 stocks in the S&P 500 Index that remains a dividend holdout. While Alphabet has never paid a dividend, many other stocks have maintained long histories of dividend growth, such as the Dividend Aristocrats.
The Dividend Aristocrats are a group of 65 stocks in the S&P 500 Index, with 25+ consecutive years of dividend growth. You can see all 65 Dividend Aristocrats here.
Additionally, you can download a full list of all 65 Dividend Aristocrats, along with important metrics that matter (such as dividend yields and price-to-earnings ratios) by clicking on the link below:
But just because a company does not currently pay a dividend, does not necessarily mean it never will. Alphabet certainly generates enough free cash flow to support a dividend payout, meaning it theoretically could choose to start paying a dividend at any time.
While it is not a sure bet in the near-term, investors should not completely ignore the possibility of Alphabet joining the long list of dividend stocks at some point in the future.
Investors most likely know Alphabet by its former name, Google. It changed its name to more accurately reflect the fact that it has expanded well beyond its origins in search. It now exists as a conglomerate known as Alphabet. The stock trades under two share classes, an ‘A’ class and a ‘C’ class. The ‘A’ class, GOOGL, has voting rights, while the ‘C’ class, GOOG, does not. Alphabet is a massive technology giant, with a market capitalization above $1.1 trillion.
Alphabet operates several businesses: Google search, Android, Chrome, YouTube, Nest, Gmail, Maps, and more. These businesses lead their respective categories, and continue to drive growth for the company.
In late October (10/29/20) Alphabet released first-quarter financial results.
Source: Investor Presentation
For the quarter, the company reported $46.2 billion in revenue, up 14% compared to the same quarter last year. On a constant-currency basis, first-quarter revenue increased 15%, a highly impressive growth rate.
Advertising revenue, which remains Alphabet’s largest source of revenue, increased 6.5%. Also aiding results was a 32.4% improvement in YouTube revenues as well as a 44.5% increase in Google Cloud.
Net income totaled $11.25 billion and earnings-per-share came in at $16.40, compared with earnings of $7.07 billion and EPS of $10.92 in the same period the previous year. Solid results in Google Search was a positive, while the performance in Alphabet’s other businesses drove the 47% increase in earnings-per-share.
There is little doubt that Alphabet was one of the best high-growth stocks of the past decade. From 2010 through 2020, Alphabet was able to grow earnings-per-share by an average compound rate of 14.1% annually. This is a highly impressive growth, as even 10 years ago Alphabet was a very large company.
Its growth was fueled in large part by its core search business, while newer platforms like YouTube have added to its growth. Going forward, although we do not expect Alphabet to maintain its huge growth rates of the past, we do believe the company can continue to grow at a satisfactory rate.
We expect 12% annual EPS growth over the past five years, focused on two specific growth drivers. First, Google remains the world’s dominant search engine, which generates a remarkable amount of cash. It is true that growth in search may slow at some point, but we see plenty of opportunity as the network effect continues to take hold around the world (making Google more and more valuable to advertisers with each additional user).
Second, the company makes significant investments in new technologies, through its operating segment known as Other Bets. This segment is where Alphabet makes high-risk, high-reward investments. Alphabet’s Other Bets include life sciences brand Verily and Google Fiber, which provides broadband internet services in the United States.
The Other Bets segment still represents a very small part of the company, but is growing at a high rate. Third-quarter revenue from Other Bets increased 14.8%. And while many ventures inside the Other Bets segment will not pan out, others could propel Alphabet to its next major growth product or service.
In the meantime, Google’s core search business remains a cash cow with plenty of future growth potential. Additional growth is likely from Google’s other major businesses such as YouTube and Android. Google is still very much a growth company. And thanks to its huge size, it now has the financial strength to possibly pay a dividend to shareholders at some point in the future.
Why Alphabet Could Pay A Dividend
The main reason why companies do not pay a dividend is rather simple. Some companies simply cannot afford to distribute cash to shareholders. This is fairly common in technology, a rapidly changing and highly competitive industry that requires significant investment in growth. Many technology companies need to plow all cash flow back into the business to continue innovating to stay ahead of the competition.
However, Alphabet is far removed from its days as a startup. It is now a diversified tech conglomerate, with annual revenue approaching $162 billion. The company is also highly profitable. We expect Alphabet to generate earnings-per-share of $45.00 in 2020. Plus, Alphabet generates plenty of cash flow. The company generated free cash flow of almost $31 billion last year.
This would, in theory, allow Alphabet to pay a dividend if it chose to. For example, Alphabet could choose to distribute 25% to 30% of its annual EPS, which would still represent a fairly low payout ratio. In this case, the company would pay a dividend of $11.25 to $13.50 per share. Based on the recent Class A stock price of $1,646 per share, this would equal a dividend yield of 0.7% to 0.8%.
Alphabet would not be considered a high-yield stock by any means, but dividend-paying technology stocks rarely provide above-average yields. Fellow tech giants Apple (AAPL) and Microsoft (MSFT) have dividend yields of 0.7% and 1.1%, respectively. Alphabet’s projected dividend payout would put it roughly in-line with its closest peers. And, its future EPS growth would easily allow the company to raise its dividend at a high rate.
Finally, Alphabet’s fortress balance sheet provides another reason for the company to return cash to shareholders through a dividend. Alphabet ended the 2020 third quarter with $119.7 billion in cash, cash equivalents, marketable securities, and non-marketable investments on its balance sheet.
Alphabet has a mountain of cash piled up, and debt is not much of a concern. It ended last quarter with just $4.6 billion of long-term debt, giving the company ample liquidity to further support a dividend.
Like many technology stocks, Alphabet has never paid a dividend to shareholders. But as companies mature, and grow their profits and cash flow, their ability to pay a dividend rises as well. It appears Alphabet is easily able to pay a dividend; it simply has not made the decision to initiate a dividend yet. But this could change, which is why investors should not be surprised to see Alphabet start paying dividends at some point in the next several years.