I'm sure most investors have noticed that IT companies have been paying dividends to their shareholders over the past few years. In 2011, Cisco (CSCO) gave returns to their shareholders and in 2012 Dell (DELL) did the same. Cisco was yielding over 3% on their shares annually. Ideally IT companies begin to do so when their growth slowly declines, it's always better off paying dividends when a company is in a good financial position hence making sure they return cash to their shareholders.
Apple (AAPL) announced in 2012 that they were going to pay dividends again, the last time Apple did pay dividends was several years ago. Apple also stated that they were set to buy back shares in order to return $45 billion to their shareholders over a period of three years. Apple is expected to buy back shares and start paying dividends soon as the recent quarter just ended.
Keeping the above in mind it's about time we ask the major question:
Is Google ready to start paying dividends?
The very thought of this has got me all excited to be honest. Let's try and analyse Google's performance in 2012 and see where the company stands. In January 2012, Google was not able to meet the previous Q4 estimates which resulted in a dip in the share price. Q2, however, helped Google (GOOG) boost its revenue growth rate with the acquisition of Motorola Mobility. Though this acquisition lifted the revenue growth rate, Google's revenue margin seemed to suffer. From Q1 to Q3 of last year there was a decline of 11% in Google's GAAP gross margins, net profit margins also declined by 8%. Google would definitely be looking for a margin rebound in 2013.
Q3 reports sent a wave of panic amongst investors, as Google completely missed out on their estimates. As a result of this Google's stock price dipped for a few weeks. Clearly the margin figures mentioned above were one of the prime reasons for the same. Q4 reports are set to arrive on the 22nd of Jan. Though the margins are declining Google is still a giant in terms of profit. Over the past four quarters Google was able to generate a GAAP net income of $10.57 billion and a Non GAAP net income of $12.82. These figures clearly show Google's potential irrespective of their margins.
Balance sheet figures as compared to the tech companies
Google has a cash pile (Cash, short and long term investments, cash equivalents) of $46,787 million, Apple at the same time has $121,251 million and Cisco has $45,000. Google's total assets are worth $89,730 million, Apple's asset worth is $176,064 million and Cisco has assets worth $92,643 million.
Market capital of Google is $213,650 million, Apple's is 492,460 and Cisco's is $108,520 million.
Despite of all these figures Google has the ultimate financial leverage. As compared to the other two giants Google has the least debt ratio. Apple has a debt ratio 32.86% , Cisco has a debt ratio of 43.11%, while Google has a commendable debt ratio of only 24.19%. This puts them in the driving seat as far as financial flexibility is concerned.
Would Google opt to pay dividends or buy back stock?
Many investors state that Google is overvalued, primarily because of the fact that unlike Apple or Cisco, Google does not pay a dividend, they're not buying back any of their stock, they do not seem to grow as much as Apple and still trades at a premium as compared to Apple. Now keeping in mind the figures mentioned above, Google is said to have fewer than 330 million shares outstanding, so a premium of $3 per share would mean that Google would have to shell out roughly a billion dollars on dividends. Google's cash pile rose by $1.37 billion and that included the acquisition of Motorola Mobility. Clearly Google is still trying to get the hang of what they plan to do with this latest acquisition which means that they would not intending to make any other such purchases in the near future.
Keeping the above in mind, Google settling for a $3 quarterly dividend would cost Google about $4 billion a year. A company like Google who fetched roughly $12 billion in operating cash flow could surely afford 4 billion which is also 1.63% of Google's annual yield.
Irrespective of how big Google is, people have noticed a decline in the growth numbers and are expecting more from this internet giant. As far as further investments are concerned, Google is still trying to accommodate and improve on their latest Motorola Mobility acquisition. Although a huge revenue stream is expected from this investment I'm pretty sure that Google would need time to figure out a way to improve on it. Keeping this in mind, it's obvious that Google would not be opting to make any such major investments in the near future.
Google is still trading at a huge premium as compared to the other big names, many of whom pay dividends and buy back stock. The way things are going I wouldn't be surprised to see Google pay a $3 quarterly premium to compensate for the premiums investors are paying. This gives them much more stable if not better position in the stock market. $4 billion a year on dividends would only help Google stay dominant. Hopefully in 2013 we will see the company announce the same.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.