Tech and dividends
Tech and growth were once interchangeable terms. Tech stocks needed every dollar they generated to reinvest into the business. But those days are over. Dividends in the tech sector seem to be the new norm. In 2009, Oracle Corporation (NASDAQ:ORCL) initiated a dividend, followed by Cisco Systems, Inc. (NASDAQ:CSCO) in 2011 and Dell Inc. (NASDAQ:DELL) in 2012. Finally, even Apple Inc. (NASDAQ:AAPL) joined the Tech Dividend Stocks Club in 2012.
Why are many tech stocks paying out dividends today? It’s simple: As their growth trajectories slow, these companies are still raking in loads of cash — Google Inc (NASDAQ:GOOG) included. Just look at the percentage of sales these tech companies are converting to free cash flow:
Source: Morningstar’s key ratios for Google, 2012.
Now compare those metrics with some megacap names not in the tech sector:
Source: Morningstar’s key ratios for respective companies shown, TTM.
No wonder these tech stocks are paying dividends (all but Google, of course). They’re redefining the term “cash cow.”
The case for Google’s dividend
There’s no reason Google Inc (NASDAQ:GOOG) couldn’t pay a substantial dividend just like some of its peers. It has the characteristics of a prime dividend stock:
An annuity-like revenue stream as the owner of the world’s largest search and digital ad platforms.
Lots of cash (about $50 billion).
Very little long-term debt (about $3 billion).
Cash cow characteristics (in 2012, Google converted about $0.24 of every dollar of sales into free cash flow).
A durable competitive advantage (thanks to its scalable market leadership).
And Google’s cash hoard will undoubtedly continue to grow. In the past four years alone, Google has tripled its cash hoard. Even if the past is not indicative of the future, it’s simply logical: A fast-growing digital ad market should continue to boost Google’s annual cash flow, especially in light of Google’s 60% market share of worldwide search.
Furthermore, as Google Inc (NASDAQ:GOOG) grows, the company will most likely find fewer meaningful ways to spend its money in meaningful amounts. That will eventually force the board of directors to discuss ways to return more cash to shareholders. And that, of course, is exactly what happened to Apple just over a year ago. Now Apple Inc. (NASDAQ:AAPL) pays investors $3.05 in dividends per share each quarter.
Is Google next?
As Fool contributor Andrew Tonner said in a recent video, Google Inc (NASDAQ:GOOG) probably won’t be announcing a dividend anytime soon, naming a dividend’s association with a slow-growth image as the primary reason. But on Google’s current trajectory, it seems inevitable that the company will return cash to shareholders in the longer term. If I’m wrong? Then you’re stuck with a reasonably priced, excellent business that’s likely to endure for years.
The article Google’s Inevitable Dividend originally appeared on Fool.com and is written by Daniel Sparks.
Fool contributor Daniel Sparks has no position in any stocks mentioned. The Motley Fool recommends Apple, Cisco Systems, Coca-Cola, Google, McDonald’s, Procter & Gamble, and Starbucks and owns shares of Apple, Google, McDonald’s, Oracle, and Starbucks.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
