Why Google Shouldn't Pay a Dividend

Over the weekend, Kevin Kelleher of the GigOm blog network argued that Google (Nasdaq: GOOG  ) should start paying a dividend to investors:

Five years ago this April, Google filed to list its stock publicly. The founders let potential investors know it wouldn't play by some of Wall Street's rules, including paying them a cash dividend -- which, the prospectus boasted, Google had never done. And as of today, it still never has. But maybe it should -- at least until things turn around for Google.

At least until things turn around? Bad idea. Dividends aren't a stop-gap, payments that can be turned on and off like a faucet. Look at history. Once issued, dividends become expected payments -- stop paying, or reduce the payout, and investors will revolt.

Whither dividends?
And while it could be a coincidence, last year was one of the worst markets on record and the worst year for dividends in five decades. Cutters such as Fifth Third Bancorp (Nasdaq: FITB  ) and Freeport McMoRan Copper & Gold (NYSE: FCX  ) badly lagged the market's 40% loss during 2008.

I don't think that Kelleher is wrong to ask whether Google should pay a dividend. Plenty of Google's tech-tastic peers pay one, including Intel (Nasdaq: INTC  ) , Microsoft (Nasdaq: MSFT  ) , and IBM (NYSE: IBM  ) . It's perfectly fair to consider whether Google should join the party.

My issue is with how he poses the question. Kelleher assumes, independent of further financial analysis, that because Google has the cash and the heft to pay a dividend, it should. "The biggest obstacle to Google paying a dividend is more of an emotional one -- corporate pride. Dividends are what mature, aging companies pay to keep angry investors at bay," he writes.

Corporate pride? Really?

I doubt it. Google executives have pride, to be sure; just look at their aggressive pursuit of Microsoft. But citing pride as a barrier to a dividend ignores some important fiscal truths about the Big G. Top of the list is execution; management has a history of investing well. Take its most recent quarter. Even as Google shut down development on six nascent projects, cost cuts yielded a better-than-expected earnings result.

And for all its failures, when Google wins, it wins huge. Google Maps and Google Docs, for example -- both of these services were, at one time, projects within the Big G's Labs.

Think of Google as you would an expert poker player. No doubt it'll lose some big hands, but by investing heaviest when the odds favor success, it produces better-than-average returns on equity and invested capital:






Return on invested capital





Return on equity





Data current as of Feb. 22, 2009.

Yes, those numbers are declining, but they still dwarf the stats put forth by Yahoo! (Nasdaq: YHOO  ) , its closest peer.

Bottom line: Google is a value creator. Why take retained earnings away from a company that's proven it can produce returns for the sake of a short-term dividend? It doesn't make sense.

On the other hand ...
Nevertheless, Kelleher is right that Google shareholders have suffered over the past year. A dividend could offer relief to battered portfolios.

You could also argue that, given a planned $460 million stock options repricing plan -- a bold wealth transfer from shareholders to employees -- now is the perfect time for a one-time dividend. Make it $460 million precisely, $1.46 for all 315.3 million shares outstanding as of this writing. A check will suffice, thanks.

We've seen one-time payments before. Microsoft offered shareholders one in 2004, $3 per share. Were Google to offer investors something similar today, it would create needed goodwill yet allow management the option to retain future earnings.

Here in the U.S., investors view dividends as a serious commitment, to be issued only when retained earnings are failing to produce above-average growth. Does that sound like Google to you? Yeah, me neither.

Google is a Rule Breakers recommendation. Intel and Microsoft are Inside Value picks. Try either of these Foolish services free for 30 days. There's no obligation to subscribe.

Tim had stock and options positions in Google and a stock position in IBM at the time of publication. Check out his portfolio holdings and Foolish writings, or connect with Tim on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool and invites you to help yourself to its disclosure policy.

Read/Post Comments (7) | Recommend This Article (4)

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  • Report this Comment On February 23, 2009, at 4:07 PM, pondee619 wrote:

    If a company does not pay a dividend, how do I get money from it? How do I reap any reward for loyal investing? How do I convert paper profits into real profits?

    Why am I investing in the first place? To substancially increase my wealth. But if I can't spend that wealth at some time, what good is it?

    Is a stock that pays no dividend like a collectable postage stamp? a gold brick? a rare coin? (At least with Art or other collectables, you can enjoy looking at it.) Sure it has value, but the only way to get at/use that value is to sell it. And then you don't have it anymore.

    Is the whole exercise of investing just to buy something and then sell it later at a higher price? Isn't that just trading with different time frames?

    We are all going to need income from our holdings at some point.

  • Report this Comment On February 23, 2009, at 4:27 PM, tradingmarkets wrote:

    I want to own the company. And I want my company (Google in this case) to pay me a portion of it's earnings. What is wrong with that? In fact, this making money based on stock price gains is nothing but a scheme of shuffling money between investors. I make money and someone else loses. This concept encourages irresponsible executive decisions that favor short term gains. I suggest the following:

    1. Tax capital gains at %50, tax dividents at 0%. Encourage companies to make real money and pay it out to owners instead of encouraging lies about future prospects.

    2. Cap all executive pay at 3x company avarage paycheck instead of the usual 100 million a year they get. Give executives hefty stock options that will vest every year during their lifetime. Then they will be inclined to make long term decisions that will effect their future earnings. They won't care that much about this quarter!

  • Report this Comment On February 23, 2009, at 5:06 PM, SkepticalOx wrote:

    Um. Most Berkshire Hathaway shareholders seem to have no issues with the no-dividend policy. Look how that turned out.

    Secondly, being a "loyal" shareholder isn't always in your best interest. You shouldn't be "loyal" to an investment for the sake of being loyal, and only stay invested if you still believe in your valuation of the firm and/or your thesis on its growth prospects. The market doesn't give a crap about an investor's loyalty to a company if that company isn't providing the earnings.

  • Report this Comment On February 23, 2009, at 7:40 PM, StocksBuyorSell wrote:

    Google will need all the cash it can get over the next few years to keep innovating. It needs money for R&D as well as infrastructure and acquisitions.

    Its money would be much better spent internally than giving it back to shareholders.

  • Report this Comment On February 23, 2009, at 10:02 PM, pondee619 wrote:

    "Um. Most Berkshire Hathaway shareholders seem to have no issues with the no-dividend policy. Look how that turned out."

    How did that turn out. The ONLY way to enjoy the money is to sell the stock. Then you don't got it no more. It is then over.

    Berkshire is THE example. A very valuable gold brick. In order to enjoy, you got to get rid of it. Then you can't enjoy it.

  • Report this Comment On February 23, 2009, at 10:23 PM, dividendgrowth wrote:

    Some people have a twisted way of thinking.

  • Report this Comment On February 27, 2009, at 2:24 PM, BigBadTroll wrote:

    I think there's a bit of confusion in the comments here. If you want an investment that pays income, you should buy an income-producing investment, such as a bond or a dividend-paying stock. Non-dividend-paying stocks don't pay dividends, because that's not what they're for - they're for capital appreciation. And, yes, for you to benefit from capital appreciation in anything - stocks, houses, classic cars - you have to sell (or borrow against) the item that's value has appreciated. This should not be news to anyone here.

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