Source: Zhitong Finance
As Google creates more cash flow, investors are increasingly hoping that the company can learn from Meta's strategy and start paying dividends.
Over the years, the search giant has been using excess cash for share buybacks. Many investors expect that when Google releases its earnings report on April 25, local time, the company will allocate another 70 billion US dollars for repurchases. However, analysts from J.P. Morgan Chase to Truist Securities all believe that a small dividend payment is a way to push the stock higher, similar to Meta's move in February, when the stock surged 20%.
“Dividends would be welcome,” said Andrew Zamfotis, portfolio manager at Ami Asset Management Corp. “While investors are still looking for growth in these companies, cost discipline is also valuable today, and the decision to launch dividends shows that management will be careful and try to allocate capital in a way that balances growth and return on capital.”
Dividends have traditionally been seen as the domain of more mature, slower growing companies, but this policy is becoming increasingly popular among tech companies. In addition to Meta, CRM.US (CRM.US) and Booking Holdings (BKNG.US) have also begun paying dividends in recent months. Of the six largest US tech companies by market capitalization, Google and Amazon (AMZN.US) are the only two companies that do not have quarterly dividends.
Since this year, Google's stock price has risen 10%, outperforming Microsoft (MSFT.US) and the Nasdaq 100 Index. Growing optimism about its generative AI strategy has recently supported the stock's performance, although it fell to a three-month low in March after disappointing earnings reports and concerns that AI tools could challenge its dominance in search advertising.
According to compiled data, Google's revenue is expected to increase 14% this year. Among them, cost reduction measures will support profitability, and the company's free cash flow is expected to reach a record $83 billion in 2024. By the end of 2023, Google's cash and cash equivalents surpassed $110 billion.
Tejas Dessai, a research analyst at Global X ETFS, said, “We think Google may follow Meta's example and pay dividends this year. “Given the favorable advertising market and recent cost-saving measures, now seems the right time to take this step, and investors are generally positive about it.”
Admittedly, Google is also facing other cash needs, such as increasing the computing power of artificial intelligence. According to compiled data, the company's capital expenditure reached a record $32 billion last year, and this expenditure is expected to increase by another 27% in 2024. Wall Street's feeling, however, is that Google has plenty of cash for infrastructure spending and greater return on capital.
Additionally, market professionals now see initial dividends no longer as a sign of declining investment opportunities for these companies, but rather as a sign of increased strength.
Jenny Harrington, CEO of Gilman Hill Asset Management, said, “For businesses, sitting on cash in this environment is still the second-best option. Even though their return on cash is 5%, the credit they earned by returning cash back to shareholders through dividends, or the benefits they receive from buybacks, means these are all better capital allocation decisions.”
edit/lambor