Alphabet’s cash boom is raising dividend hopes on Wall Street

On Apr 22, 2024

(Bloomberg) — Alphabet Inc. is bringing in so much cash that hopes are rising it will take a page out of the Meta Platforms Inc. playbook and start paying a dividend.

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The search giant has been plowing excess cash into share buybacks for years, and many investors expect another $70 billion to be earmarked when Alphabet reports earnings on April 25. But analysts from JPMorgan Chase & Co. to Truist Securities are among those that see a small dividend as a way to move the needle further for the stock, similar to Meta’s February move that helped fuel a 20% jump in shares.

“A dividend would be well received,” said Andrew Zamfotis, portfolio manager at Ami Asset Management Corp. “While investors are still looking for growth from these companies, today there is also value in cost discipline and the decision to initiate a dividend suggests that management will be prudent and attempt to allocate capital in a way that balances growth and capital return.”

Dividends have traditionally been seen as the province of more mature and slower-growing companies but the policy has been gaining popularity among tech firms. In addition to Meta, Salesforce Inc. and Booking Holdings Inc. have also initiated dividends in recent months. Among the six biggest US technology companies by market value, Alphabet and Amazon.com Inc. are the only ones that don’t have a quarterly payout.

Alphabet shares are up 10% this year, outperforming Microsoft Corp., as well as the Nasdaq 100. Rising optimism about its generative AI strategy has supported the stock of late, though it fell to a three-month low in March in the wake of a disappointing earnings report and fears that artificial intelligence tools could challenge its dominance in search advertising.

With Alphabet’s revenue expected to rise 14% this year and cost cutting efforts supporting profitability, the company’s free cash flow is projected to hit a record $83 billion in 2024, according to data compiled by Bloomberg. The Google parent also had more than $110 billion in cash and cash equivalents at the end of 2023.

“We think Alphabet is likely to follow Meta’s lead by introducing dividends this year,” said Tejas Dessai, research analyst at Global X ETFs. “Given the favorable advertising market and recent cost-saving measures, now seems opportune for such a move, which has generally been positively received by investors.”

Of course, Alphabet faces other demands for its cash, such as adding AI computing capacity. The company had a record $32 billion in capital expenditures last year and that spending is expected to jump another 27% in 2024, according to data compiled by Bloomberg. However, the feeling on Wall Street is that Alphabet has plenty of cash for infrastructure spending as well as bigger capital returns.

Rather than seeing dividend initiations as a sign that the companies have fewer investment opportunities, market professionals are now viewing it as a sign of strength.

“For corporations, sitting on cash in this environment is still suboptimal” said Jenny Harrington, chief executive officer at Gilman Hill Asset Management. “Even if they’re getting 5% on cash, the credit they get for returning cash to shareholders through dividends, or the bump they get from buybacks, mean that those are better capital allocation decisions.”

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