Google's Democratic Deconstruction Of Apple's Dividend

Apr.15.12 | About: Alphabet Inc. (GOOG)

This article compares and contrasts Google's (GOOG) new class of shares with Apple's (AAPL) new dividend. Investors will find this actionable as it contributes to a theoretical framework for valuing shares across varying approaches to dividends. In particular, this article connects the media's portrayal of Google / Apple return of capital with a transcendent para-political conflict.

We can imagine that stock in a company gives holders a couple privileges (among others):

1) voting rights

2) exposure to wealth of company

Many shareholders are too small to benefit from voting rights. But let's postulate that voting rights have some tangible value. Then, one can say there is a balance between 1 and 2 within the overall value of a share. So whenever component 1 or component 2 is increased or decreased in isolation, there is an opposite change in the other. Like, if I add 3% to my mix of egg whites, that's a reduction in egg yolks.

So, what happens when a company pays a dividend? Many would consider this to be an increase in exposure to wealth of a company. As Mel Karmazin would say, dividends represent a "return of capital". So relatively speaking, in this sense, dividends reduce voting rights. Again, dividends reduce voting rights.

Google recently reduced the voting rights of most shareholders. This is confusing to some people. To create an FAQ primer, Matt Rosoff answers his own questions for confused readers:

Q. Why'd they call this a dividend then? Dividends are cash, right?

A. Because it's paid like a dividend -- on a certain date, owners of Google stock get something new. In this case, a new type of Google stock.

It was kind of misleading, though, especially given the noise from some investors before the earnings call that they wanted to see a dividend.

"Dividends are cash, right?" -- wrong. Cash is cash. If you want cash, sell your shares. Dividends are a relative prioritization of cash in the context of held shares. That means-- relatively speaking-- things like voting rights are being lessened.

Google's maneuver means less voting rights, relative to cash. Payouts of cash (dividends proper) also mean less voting rights, relative to cash. The only difference is that Google is reducing your voting rights, while Apple is increasing your cash. But comparing Google and Apple, there is no objective net change in intrinsic value of shares, it's purely linguistic. Sure there is some management power grabbing in terms of voting rights, maybe some cash flow questions, but Google's use of the term "dividend" seems fair enough when relativity is considered.

But what about tax advantages of traditional dividends? Wealthy, powerful shareholders benefit most from the dividend payout. So Google's dividend is less of a dividend for the 1% and thus more of a dividend for the 99%. And that bugs some 1%ers.

We're seeing this political aesthetic fissure along several levels of the tech duopoly. For instance, there is a French study showing that Youtube is Left, and Apple is Right. There is the private property issue of open source versus integrated systems. There is the similar Jobsian preoccupation with protecting intellectual property, and there is censorship in China. This speaks to the philosophical struggle between capital and regulation, individuals and groups, property and people. You don't have to be with one side in particular to see that there is a fissure.

So before you jump on Google for calling its dilution of voting a dividend, ask yourself why you want a dividend instead of cash. Consider the importance of separating political aesthetics from financial terminology. Do we really want to unnecessarily commingle political bias and economic theory?

If you want your dividend to be a tax break, call it a tax break. If you want cash, sell your stock. But don't hate Google for deconstructing Apple's dividend. Sure Apple has more cash and can afford to pay out more. That's not the point. Apple could have done a buyback, and Apple did a dividend. So did Google, but Google did one for the 99%.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.