Why Google Shouldn't Pay Dividends (GOOG)

| About: Alphabet Inc. (GOOG)

The Stalwart submits: Ron, writing for the blog Xooglers (a blog where former Google employees talk about the insides of the world's #1 search engine), wonders aloud why anyone would buy Google's (GOOG) stock. Strangely, his argument isn't that the shares are, or ever have been overvalued:

Suppose I wanted to sell you a share of my car. There are many reasons why you might want to buy. For example, I might let you drive it part of the time. Or maybe it's a limousine that I lease out, and I'd give you part of the income. Or maybe it's a collector's item and I'd give you part of the proceeds when I sell it.

But suppose I offered you the following deal: I'll sell you a share of my car, but you don't get to drive it. It generates income, but I won't share it with you, nor give you any say in what I do with the proceeds. I have no intention of ever selling it. I won't listen to anything you have to say about how the car ought to be used, and I won't tell you what I plan to do with it. In fact, buying a share of my car will provide you with no tangible benefits whatsoever. All it will do is give you bragging rights that you own a share of my car.

How many people do you think would accept a deal like that?

Well, if that car is Google, a lot.

Just as there are many reasons one might want to buy a share of a car, there are many reasons one might want to buy a share of a company. The company might pay dividends, or it might offer the potential of paying dividends in the future. If you buy a big enough share you can have a real say in how the company is run. Even if you don't have the wherewithall to buy a big enough share to let you run the company, your small share might be sought out by someone who does have the means to buy a controlling interest. Or being a shareholder might entitle you to certain special privileges...

There is really no difference at all between buying a share of Google and buying a share of my hypothetical car, which you never get to drive and over which you have no control and which will never put money in your pocket. The only difference is that the foolishness of the deal is more evident in the case of the car.

A surprising number of people think this way, including Mark Cuban, who likens stocks that don't pay dividends to a Ponzi scheme (although, oddly, he owns several himself). Not that readers need this explained, but here's a nice counterexample to use to explain this to your friends. Imagine, while rummaging through a garage sale, you came across a clairvoyant crystal ball. Perhaps it told you sports scores, only, like the almanac in Back To The Future II, the scores were several years off. Its only value was in its potential. Does this mean that until that time, the crystal ball is worthless? No, it's still a very valuable item, and you should still buy it, even if you never once see it tell you how to fill out your NCAA brackets.

Here's another way of thinking about it -- why are Larry and Sergey's shares valuable? They don't collect a dividend either. Why don't they just throw them in the fire? Part of it is, because if they wanted to, they could turn on the dividend faucet, and start collecting income on their shares -- but then so could every other shareholder. The same potential for Sergey and Larry exists for every other shareholder, and that potential is valuable. At the moment the market values that potential at around $100 billion dollars. Furthermore, for a growth company like Google, a dividend detracts from the value. If the cash can reasonably plowed back into corporate activities, with realistic hopes of achieving more growth from it, then it's a wise move.

Proponents of the dividend=value argument also fail to account for the fact that dividends alone don't make most stocks worthwhile, unless you're talking about a utility or REIT, in which dividends are the only point. The capital structure of most corporations is such that the money is plowed pack into the company. Don't like what they do with it? Invest your money elsewhere.

Xooglers is an interesting blog, but they don't seem particularly qualified to talk about investing, in Google's stock or others.

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