Pundits and investors alike are once more calling for Google, Inc. (NASDAQ:GOOGL)(NASDAQ:GOOG) to pay a dividend. Bad idea. Really bad idea. Google isn't an incremental business, and it's going to need those billions to make sweeping bets that others won't.
The case against incrementalism
You can hear the commitment in Larry Page's statements about the future of technology. Here's a good example, taken from a recent interview with the UK's Financial Times newspaper:
"It's unsatisfying to have all these people, and we have all these billions we should be investing to make people's lives better. If we just do the same things we did before and don't do something new, it seems like a crime to me."
Context is important here. According to the FT, the quote is in reference to a debate Page had with the late Steve Jobs, who had been cautioning him about taking on too much. Page apparently wouldn't hear of it, arguing instead that it was Google's job to help build a better world and that Apple (NASDAQ:AAPL) should join the effort.
The case for a dividend
Analysts and activist investors may disapprove of that view. One, Carlos Kirjner, says Google's near $60 billion treasure chest will grow to $100 billion by the end of 2016, The Wall Street Journal reports. Sound optimistic? Maybe so. History nevertheless suggests that Google could pay a dividend and still fund a wide of projects.
Look at Google Ventures and Google Capital. Combined, the company's equity investment vehicles accounted for roughly $2 billion in "non-marketable equity" as of September 30. That includes substantial bets on privately held innovators such as Uber for transportation and Kabam for mobile gaming, all while producing billions in excess cash from operations. (More than $21 billion over the trailing 12 months alone, S&P Capital IQ reports.) The math seems to favor Kirjner's projection.
Can you imagine what might be if Google put that excess back into the hands of shareholders? Distributing $40 billion over two years -- or $58.97 a share if accounting for all classes of stock -- would yield over 5% annually on A and C shares at current prices. A great dividend, to be sure, and much more than what Apple and Microsoft yield at the moment.
Thinking too small
Many investors I know would take the guaranteed 10% return, since gains in the stock market can be fleeting. But is that really the best use of Google's capital? Page certainly doesn't seem to think so, and neither do I. Huge portions of the world remain disconnected from the broadband Internet. Other regions have access but lack the wealth and well-being to taste the fullness of its fruits.
If I believe Page -- and I do -- Google's long-term goal mirrors that of rival Facebook: a free, healthy, connected world citizenry with always-on access to the greatest communications platform ever conceived. Both companies can win in that future, but funding it won't be cheap. Take these six big ideas.
1. Global wireless connectivity. At one point, Goldman Sachs estimated that it would cost Google roughly $140 billion to cover the United States with a cable-like fiber network. Meanwhile, we know from a United Nations report that roughly 4 billion people remain disconnected from the Internet. Filling the gap via wireless technology could also cost hundreds of billions. Either way, Google doesn't yet have the capital to connect the globe. (Though "Project Loon" is moving us in the right direction.)
2. Disruptive gains in clean energy. Utilities spend billions to outfit power plants and make them more efficient. Even new utilities such as SolarCity (NASDAQ:SCTY.DL) require billions in capital to make clean energy readily accessible to a large population. According to S&P Capital IQ, the company had nearly $1.5 billion in debt on its books as of September 30. Google's billions could help further accelerate the deployment of clean energy technologies.
3. Order of magnitude improvements in 3-D printing technology. While it's possible to buy 3-D printers for less than $1,000, would you trust any of them to print a reliable smartphone that could last years in the deserts of Africa or the tough terrain of Asia's highlands? Connecting the world means more than just supplying signal. We also need cheap access to industrial-grade devices for accessing the web anywhere, anytime. I'm talking about smartphones that can be printed for $10 and sold for $50. Or convertible laptops that print for $25 and sell for $100. Or full-scale laptops that print for $75 but sell for $300. Hardware is a bottleneck to access.
4. Clean water plants. What good would it be to have pervasive Internet access if the population it served wasn't well enough to enjoy it? Clean water is big problem for all sorts of emerging economies. In Ghana, a household water connection can run $7,000. In Kenya, $30,000, according to estimates supplied by water.org. Improving delivery at scale would be a huge victory, unleashing economic benefits as healthier workers set forth to improve schools and other civic infrastructure. These are Google's future customers. Or at least they could be, if they live long enough to enjoy the digital gains we're already seeing here in the U.S.
5. An end to programming languages. Yes, I know how this sounds. Why would Google and Facebook seek to make themselves irrelevant? Simple. Purpose-built apps won't fit every need, and in a broadband world, we won't wait to be served. We'll serve ourselves. A framework for combining data, apps, and services to get our own answers -- without the need to write code -- will be key in that environment. But it won't be cheap or easy to build.
6. Smart sensors for improving the physical world. When International Business Machines introduced us to the idea of a "Smarter Planet," it referred to using sensors to network and track the world around us. But who gets this data and how might we use it for the greater good? Lowering the cost of sensor deployment, and then plugging these nodes into large, publicly accessible databases, could help address the greatest environmental challenges of our time while creating opportunities for a new generation of scientists who will use digital technology to collaborate.
Chances are that these initiatives would fail to produce meaningful returns over the next three to five years. I'm OK with that as a shareholder. A better, healthier, and more connected world is a good legacy for my three children, and I'll be happier for having invested in it.
I'll be richer, too. Because that more economically upscale world is going to use the Google answer engine even more pervasively than we do now. But only if we allow Page and his team to make the big investments required to get to that point. Paying a dividend would only get in the way.