Will Alphabet stock ever pay a dividend?

Updated March 19, 2023 by Nathan Parsh

Income investors can find quality dividend stocks from various market sectors, such as healthcare, 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 ~90 stocks in the S&P 500 Index that continues to retain dividends. While Alphabet never paid dividends, many other stocks, like Dividend Aristocrats, have a long history of dividend growth.

The Dividend Aristocrats are a group of 68 stocks in the S&P 500 Index with more than 25 consecutive years of dividend growth. You can see all 68 Dividend Aristocrats here.

Additionally, you can download a full list of the 68 Dividend Aristocrats, along with important metrics that matter (like dividend yields and price-earnings ratios) by clicking the link below:

But just because a company doesn’t currently pay dividends doesn’t necessarily mean it never will. To be sure, Alphabet generates enough free cash flow to support a dividend payment, which means it could, in theory, choose to start paying dividends at any time.

While not a sure bet in the short term, investors shouldn’t completely ignore the possibility of Alphabet joining the long list of dividend stocks at some point in the future.

business overview

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 shares trade under two classes of shares, an ‘A’ class and a ‘C’ class. Class ‘A’, GOOGL, has the right to vote, while class ‘C’, GOOG, does not.

Alphabet is a massive tech giant. It is a mega-cap stock with a market capitalization of $1.3 trillion.

Alphabet operates multiple 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 February 2022, Alphabet announced a 20 for 1 stock split.

In early February (2/2/2023), Alphabet released its fourth quarter and full year financial reports. results.

Fountain: Fourth Quarter Press Release

The company reported $76 billion in revenue for the quarter, up 1% compared to the same quarter last year. By 2022, revenue grew 10% to $282.8 billion. At constant exchange rates, fourth-quarter revenue was up 7% and full-year revenue was up 14%, both strong growth rates.

Advertising revenue, which remains Alphabet’s biggest source of income, fell 3.6% to $59 billion in the quarter. These results were partially offset by 32% growth in Google Cloud.

For the quarter, net income totaled $13.6 billion and earnings per share were $1.05, compared to net income of $20.6 billion and earnings per share of $1.53 in the prior year period, as the increase in expenses weighed on the bottom line. For the year, net income of just under $60 billion and $4.56 earnings per share compared unfavorably with $76 billion or $5.61 earnings per share.

growth prospects

There’s no question that Alphabet was one of the best high-growth stocks of the past decade. Despite last year’s results, Alphabet grew earnings per share at an average CAGR of 10.9% per year from 2012 to 2022. This is impressive growth, as even more than a decade ago, Alphabet was a very big.

Its growth was largely driven by its core search business, while newer platforms like YouTube have added to its growth. Going forward, while we do not expect Alphabet to maintain its tremendous growth rates of the past, we believe the company can continue to grow at a satisfactory rate.

We continue to expect double-digit EPS growth, but with a more conservative estimate of 12% per year over the next five years, focused on two specific growth drivers. First of all, Google is still the dominant search engine in the world, generating a remarkable amount of cash. It’s true that search growth may slow down 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 technology through its operating segment, 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 Gambling segment still represents a very small part of the company, but it is growing rapidly. And while many companies within the Other Gambling segment won’t pan out, others could propel Alphabet into its next fastest-growing product or service.

Meanwhile, Google’s core search business continues to be a revenue stream with plenty of potential for future growth. Additional growth from other major Google businesses, such as YouTube and Android, is likely. Google is still very much a growth company. And thanks to its enormous size, it now has the financial strength to possibly pay out a dividend to shareholders at some point in the future.

Why Alphabet Could Pay Dividends

The main reason why companies don’t pay dividends is quite simple. Some companies simply cannot afford to distribute cash to shareholders. This is quite common in technology, a highly competitive and rapidly changing industry that requires significant investment in growth. Many tech companies need to reinvest all of their cash flow back into the business to continue to innovate and stay ahead of the competition.

However, Alphabet is a far cry from its startup days. It is now a diversified tech conglomerate with annual revenue of about $283 billion. The company is also very profitable. We expect Alphabet to generate earnings per share of $5.19 in 2023, which aligns with analyst estimates. Also, Alphabet generates a lot of cash flow. Last year, the company generated free cash flow of nearly $60 billion.

This, in theory, would allow Alphabet to pay a dividend if it wanted to. For example, Alphabet could choose to distribute 25-30% of its annual EPS, which would still be a fairly low payout rate. In this case, the company would pay a dividend of $1.30 to $1.56 per share. The recent Class A stock price of $102 per share would equate to a dividend yield of 1.3% to 1.5%.

Alphabet wouldn’t be considered a high-yield stock by any means, but dividend-paying tech stocks rarely provide above-average returns. Fellow tech giants Apple (AAPL) and Microsoft (MSFT) have dividend yields of 0.6% and 1.0%, respectively. Alphabet’s projected dividend payout would be roughly in line with its closest peers. And its future EPS growth would likely allow the company to increase its dividend at a high rate.

Finally, Alphabet’s balance sheet of strength provides another reason for the company to return cash to shareholders through a dividend. Alphabet ended the most recent quarter with $114 billion in cash, cash equivalents and marketable securities, with another $30.5 billion in non-marketable investments on its balance sheet.

Alphabet has a mountain of cash stacked up, and debt isn’t a big concern. It ended 2022 with just $14 billion of long-term debt, giving the company ample liquidity to further support a dividend.

final thoughts

Like many tech stocks, Alphabet has never paid dividends to shareholders. But as companies mature and their earnings and cash flow increase, so does their ability to pay dividends. It looks like Alphabet can easily pay a dividend; you just haven’t made the decision to initiate a dividend yet. But this could change, which is why investors shouldn’t be surprised to see Alphabet start paying dividends sometime in the next few years.

Check out the articles below for an analysis of whether other stocks that currently don’t pay dividends will one day pay dividends: