Like Apple and Microsoft, Google Needs to Pay a Cash Dividend
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With Microsoft (NASDAQ: MSFT) recently writing off the $6.2 billion acquisition cost of aQuantive, Google (NASDAQ: GOOG) needs to start paying a healthy cash dividend to its shareholders. There is a tradition of high tech companies such as Google and Microsoft wasting billions on takeovers, when those funds would have been better off going to shareholders as dividend income. Microsoft, Apple (NASDAQ: AAPL), Intel (NASDAQ: INTC) and Hewlett-Packard (NYSE: HPQ) are all high tech concerns with generous cash dividend frameworks that Google needs to emulate.
Google is certainly no stranger to questionable acquisitions. Its $12.5 billion takeover of Motorola has hardly been the only high tech transaction of this type to be the target of much doubt and criticism. Anand Chokkavelu of the Motley Fool wrote in The 100 Things I've Learned in Investing: "Mergers and acquisitions are overrated. Somewhere between 50% and 85% of mergers fail to boost value. The frequency of achieving promised "synergies" should be filed somewhere between unicorns and no-hitters."
It used to be the thinking of the management of high tech companies that money that would be paid out in cash dividends was better deployed in research & development, or strategic acquisitions. Transactions such as Hewlett Packard's buying of Compaq for $25 billion have changed that thought process. While Google is hardly the only high tech giant to waste billions on an acquisition, it is one of the few now not to pay a dividend. The average dividend yield for a member of the Standard & Poor's 500 Index is around 2%. Intel Corporation has a dividend yield of 3.33%, Microsoft yields 2.73%, and the yield at Hewlett Packard is 2.89%. Apple recently re-started its dividend and now provides its shareholders with a 2.65% income stream.
Google can easily afford to pay a cash dividend to its shareholders rather than award non-voting stock dividends, as took place previously. Like Google and Microsoft, it is flush with cash, about $50 billion, as the result of a robust profit margin and solid earnings. Google has more than $132 in cash per share and a profit margin of 25.74%. At Apple, there is $30.52 per share in cash with a 27.13% profit margin. Microsoft has a profit margin of 23.03% and $7.50 in cash per share. The profit margin at Intel Corporation is 22.73% and there is $2.71 in cash per share. For Hewlett Packard, there is $4.21 in cash per share with a 4.21% profit margin.
There would be a number of benefits from Google paying a cash dividend that would benefit the share price. The most obvious is that funds going to the shareholders as dividend income would not be wasted on foolish acquisitions. Paying a dividend would also make Google more attractive to a wider range of investors. Some investors will only buy stocks that have the dividend component.
This number includes many institutional funds. With over one trillion dollars in its portfolio, T. Rowe Price’s Equity Income Fund is chartered to “provide substantial dividend income as well as long-term capital appreciation through investments in common stocks of established companies.” While that makes companies such as Apple, Intel, Hewlett-Packard and Microsoft eligible, it leaves out Google. There are many other mutual funds and exchange traded funds that can only buy dividend-paying securities. As institutional buyers make up about 70% of the volume in today's stock market, the more attractive the better for the share price of a company.
Dividends are also playing a larger role in the decision to buy. According to legendary investor Jack Bogle, founder of the Vanguard group and creator of the world's first index mutual fund, dividend income has provided more than 40% of the historic total return of an equity. As the stock market has been flat for over a decade, dividend income has been the only positive component of the total return equation. With interest rates so low, more are looking for dividend-paying stocks to provide retirement income and satisfy other investing needs.
Google's share price could certainly use help from more buying due to a cash dividend income feature. Year to date, it is down by 4.71%. It has pretty much been flat for the last 52 weeks of market action, off by 0.44%.
Fool blogger Jonathan Yates does not own any of the stocks mentioned in this article. The Motley Fool owns shares of Apple, Google, Intel, and Microsoft. Motley Fool newsletter services recommend Apple, Google, Intel, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.