Another threat that has been suggested comes from Facebook Inc (NASDAQ:FB). The two-fold issue is, Facebook is rumored to be getting into Google’s backyard of search results. The theory is there are about a billion people on Facebook, maybe they would like to do their Internet searches right from Facebook.
One problem is, Facebook isn’t built into any browsers as a search engine of choice. Second, users of Facebook are usually there to connect with their friends and family. I’ve seen users ask a question to get the opinion of others, but rarely have I heard of anyone using Facebook as a search tool. Google+ may take a backseat to Facebook Inc (NASDAQ:FB), but I don’t think Google’s search dominance is in any danger.
Okay point taken…How much could they afford? If you look at Google’s competitive position, they look pretty secure. It’s great that Google’s stock price has increased. It’s great that they are investing in new technologies. However, they can do all of that and still pay a dividend.
To determining if a dividend is possible, we need to look at the company’s core operating cash flow. This measure is simply their net income plus depreciation. If a company’s core operating cash flow is growing, theoretically they could consider a payout. In the current quarter, Google’s operating cash flow grew 20.26% year-over-year. By comparison, Microsoft Corporation (NASDAQ:MSFT) saw operating cash flow grow by 21.01%, Apple Inc. (NASDAQ:AAPL) actually saw a decline of 0.93%, and Facebook reported negative growth.
Now that we know Google is growing their cash flow, what about free cash flow? In the last three months, the company generated $2.727 of core free cash flow. This takes core operating cash flow a step further and subtracts capital expenditures. Using this same measure, Facebook pays no dividend, Apple Inc. (NASDAQ:AAPL) has a 26.54% payout ratio, and Microsoft has a 31.16% payout ratio.
If Google Inc (NASDAQ:GOOG) used an average of Apple and Microsoft’s core free cash flow payout ratio, they would pay 28.85% as a dividend. With $2.727 billion in core free cash flow, this equates to $786.7 million for dividends in an average quarter. With 330.45 million shares outstanding, Google could afford an annual dividend of $9.52. With the stock at over $815 a share, that equates to a yield of about 1.17%.
The point is, Google has waited long enough. The company is growing, but with diluted shares up almost 2% in the last year, they aren’t retiring shares. Paying investors a dividend, would at least show that management values their ownership. As it is, Google just keeps plowing the money into low yielding investments. With $48 billion in net cash and investments, I think the company has more than enough.
The article Google: You Proved Your Point, Now Pay Up! originally appeared on Fool.com is written by Chad Henage.
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