Google: You Proved Your Point, Now Pay Up!
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
For a while investors wondered if Google (NASDAQ: GOOG) was still a growth company? They seemed to stumble a bit as paid clicks increased, but the cost per click declined. In hindsight, it appears that Google was just protecting their market share. In the current quarter, Google proved once again that they are still a growth company. However, the company is one of the last holdouts in the technology field when it comes to paying a dividend. Shareholders have been well rewarded with the stock price increasing, but management can do more.
This is no secret
If you know anything about Google, you probably think of a mostly white page, a Google logo, and a search box. While the company is much more than their search engine, it is at the core of what the company does.
Over the last several years, Google has gone head to head with Microsoft (NASDAQ: MSFT) and Yahoo on search results, and the company still commands over 60% of desktop searches domestically. Google's Android mobile operating system is the most popular with over 75% market share. Android makes sure that Google is able to capitalize on search and mobile advertisements, and some have estimated that Google might have over 90% of search on mobile devices.
In recent years, Google introduced Google+ as a direct competitor to Facebook (NASDAQ: FB). While Google+ has a lot of functionality similar to Facebook, I think one of my friends said it best, why do I need this when I already have Facebook?
Newer investments in Motorola Mobile and projects like Google Glass and self-driving cars could change the company dramatically, but most of what Google does is sell advertisements. With revenue up 31% and paid clicks up 20%, Google is doing just fine.
What about the competition?
Seemingly every time you turn around there is someone crying that Google is facing a new competitive threat. Some have said that Apple's (NASDAQ: AAPL) products between the iPhone, iPad, and iTunes would limit the gains Google would see in smartphones, tablets, and online sales. However, Google continues to dominate the mobile OS war, and even if they don't sell tons of their own product, Google only cares that their services are being used, no matter the device.
Recently, Microsoft has launched a campaign warning Google users to not get “Scroogled.” The company brings to light the fact that Google searches your Gmail for key words to help sell targeted advertising. Microsoft's Outlook does not use this practice, and needless to say the company would love everyone to switch. However, most of this advertising seems to be falling on deaf ears, as Gmail is one of the most popular e-mail sites.
Another threat that has been suggested comes from Facebook. The two-fold issue is, Facebook is rumored to be getting into Google's backyard of search results. The theory is there are about a billion people on Facebook, maybe they would like to do their Internet searches right from Facebook.
One problem is, Facebook isn't built into any browsers as a search engine of choice. Second, users of Facebook are usually there to connect with their friends and family. I've seen users ask a question to get the opinion of others, but rarely have I heard of anyone using Facebook as a search tool. Google+ may take a backseat to Facebook, but I don't think Google's search dominance is in any danger.
Okay point taken...How much could they afford?
If you look at Google's competitive position, they look pretty secure. It's great that Google's stock price has increased. It's great that they are investing in new technologies. However, they can do all of that and still pay a dividend.
To determining if a dividend is possible, we need to look at the company's core operating cash flow. This measure is simply their net income plus depreciation. If a company's core operating cash flow is growing, theoretically they could consider a payout. In the current quarter, Google's operating cash flow grew 20.26% year-over-year. By comparison, Microsoft saw operating cash flow grow by 21.01%, Apple actually saw a decline of 0.93%, and Facebook reported negative growth.
Now that we know Google is growing their cash flow, what about free cash flow? In the last three months, the company generated $2.727 of core free cash flow. This takes core operating cash flow a step further and subtracts capital expenditures. Using this same measure, Facebook pays no dividend, Apple has a 26.54% payout ratio, and Microsoft has a 31.16% payout ratio.
If Google used an average of Apple and Microsoft's core free cash flow payout ratio, they would pay 28.85% as a dividend. With $2.727 billion in core free cash flow, this equates to $786.7 million for dividends in an average quarter. With 330.45 million shares outstanding, Google could afford an annual dividend of $9.52. With the stock at over $815 a share, that equates to a yield of about 1.17%.
The point is, Google has waited long enough. The company is growing, but with diluted shares up almost 2% in the last year, they aren't retiring shares. Paying investors a dividend, would at least show that management values their ownership. As it is, Google just keeps plowing the money into low yielding investments. With $48 billion in net cash and investments, I think the company has more than enough.
Chad Henage owns shares of Apple and Microsoft. The Motley Fool recommends Apple, Facebook, and Google. The Motley Fool owns shares of Apple, Facebook, Google, 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!