I often read complaints that Google or, more precisely, its holding company Alphabet Inc. does not pay dividends and that it should start doing so and return capital to its shareholders. However, the fact is that Google/Alphabet has already begun returning money to its stockholders. So how much money in dividends, and by other means, does Google payout to its shareholders?
Google (Alphabet) has never paid out any cash dividend to shareholders. However, it still managed to return $9.1 bn to investors in 2018, which was 30% of its net profits. It did use cash buybacks instead of dividends, which is just another way how a company can return money to its shareholders.
The table below shows how much precisely each year Google/Alphabet paid out to its shareholders and how much from it were cash dividends, and how much were cash buybacks.
Alphabet’s (Google’s) Cash Payouts to Shareholders by Year
|Year||Cash Dividends||Cash Buybacks|
|2014||$0 bn||$0 bn|
|2015||$0 bn||$1.8 bn|
|2016||$0 bn||$3.7 bn|
|2017||$0 bn||$4.8 bn|
|2018||$0 bn||$9.1 bn|
So it is false to say that Google is not paying out money to shareholders because it obviously is. It just chose, like many other companies these days, to do it in the form of cash buybacks.
Let’s look in more detail about how much it pays out relative to what it can and how payout compares with other companies and also the whole market.
💸 How much is Google (Alphabet) Paying Back to Its Shareholders Both in Dividends and Stock Buybacks?
Although it is technically correct to say that Google does not payout dividends, it is wrong to say that id does return cash to shareholders. Google is returning money to its shareholders through cash buybacks, which is just another form of how to return cash to them, and it might also be preferable form in most cases.
The chart below shows how much Alphabet Inc. paid out each year. Since 2015 Alphabet paid out more and more each ear, and based on the first three quarters of 2019 results, I can already confirm that it will continue to grow even in 2019.
Here is how it compares to Alphabets’ net income. Note that net income in 2017 was lower mainly thanks to the one-off impact of tax code changes in the US, and without that, net income would be growing in 2017 compared to 2016.
I showed you so far that Google is paying out roughly one-third of its net income, so let’s have a look at how it compares to others.
⚖️ How Does Amount Google Is Paying Out in Dividends & Buybacks Compare to Other Companies
OK, we know Google is paying out more money each year, but what is more important is to look at how it compares to the market average and also other large companies.
Since each company has a different size, it does not make sense to compare the absolute number between companies. We will have to compare cash paid out as % of Alphabet’s net profits (mostly called as “payout ratio”) and also as a % of Alphabet’s (Google’s) market capitalization (called “Cash Yield).
I would want to stress out that I will compare the total cash paid that includes both cash dividends and also money returned to investors through share buybacks. From a shareholder’s point of view, it is virtually the same thing. Comparing only dividend yield between the companies does not generally make sense.
Charts below will tell you how Google’s (Alphabet’s) cash payout compares to other companies on the market. Data for Alphabet are from their annual reports. Data for market benchmarks are based on a great article about buybacks and dividens from Aswath Damodaran, Professor of Finance at the Stern School of Business at NYU, who is a living legend in a field of valuation and company analysis.
Charts above show you that, compared to other companies, Google (Alphabet) pays out just a fraction of what other companies do. It looks that complains of shareholders that Google is not paying enough have some merit.
Since market averages can sometimes be hard to interpret, I would like to show you comparison also to a few handpicked companies based on their 2018 annual reports.
Dividends, Buybacks & Total Payout: Comparison of Alphabet (Google) with Selected Large Companies (in billions $)
|Company||Cash Dividends||Cash Buybacks||Total Cash Payout||Net Income||Payout Ratio|
|Bank of America||$6.9||$20.1||$27.0||$28.1||96%|
The table gives us quite a clear picture. Google (Alphabet) payout would have to double to be at least somewhat comparable to what other companies are doing. Even Facebook, relatively fast-growing, and still quite a young company is paying out twice as much as Alphabet is. The only company that stands out here is Amazon, which sticks to its “growth & reinvests” approach, which it is famous for.
It looks like Amazon founder Jeff Bezons and Google founders Larry & Sergey have quite similar views about returning money to shareholders.
❓ If Alphabet/Google Is Buying Back Shares, Why Is Total Share Count Still Increasing
When you look at the number of outstanding stocks for Alphabet Inc. by year, you can quickly see that something does not add up.
Total Outstanding Stocks for Alphabet Inc. and its Growth in Time
|Year||Outstanding Shares (in millions)||Growth vs Last Year|
Based on the charts that I showed earlier, we know that since 2015 Google is increasing the number of share buybacks every single year. But if Google is buying back shares, why is the total number of outstanding shares still growing? Well, the fact is that Alphabet Inc is still issuing new stocks as part of its stock-based bonuses to selected employees.
So not only are Alphabet’s buyback low in comparison with other companies, they are not even enough to offset stock issued to employees. However, if you wait until the end of 2019, we should, for the first time, see a decrease in numbers of outstanding stock. At the time of writing this article, I can confirm that the amount of the buyback is increasing significantly again in 2019 and should more than offset shares issued to employees.
❓ What About Class C Shares? Wasn’t This Supposed to Be Dividend?
In 2014 Google paid out “stock dividend.” Every Google’s stock owner received one more stock of the company for each Google share owned. But stock dividends are not cash payouts. From the shareholder perspective, there is no actual difference between the stock dividend and stock split. The difference is only technical in how it is treated in company accounting. No cash is paid out. Shareholders will have more shares, but their value will decrease accordingly.
Google’s stock dividend was specific because its dividend stock did not have any voting rights. It is generally assumed that this move was made by founders Larry and Sergey to enable them to issue new stock as employee benefits without diluting further their voting power over Google. If you are interested in Alphabet’s ownership structure and how different share Classes play a role in control of Alhabet’s voting rights, check out my article about it.
💭 Why is Google / Alphabet Not Paying Out More in Dividends or Buybacks?
I shared with you the numbers that show that Google is not at the same level as other companies when it comes to returning cash to the investors in the form of dividends or buybacks. So what is behind this decision of Alphabet Inc.? Why does it need to hold so much cash? Since Alphabet Inc. control is in the hand of just two people who control 51% of all votes, we can narrow down this question to: “Why do Larry and Sergey want Alphabet to hold so much cash?”
Here is a quick overview of the reasons I came up with. Below the list, I mention more details about each of them. It is important to note that what follows are my opinions and deductions, unlike the rest of the article, which based on real facts & data.
- Alphabet is still growing quickly and, therefore, needs more cash than a more mature company.
- Alphabet needs cash in case one of its non-google projects (“Other Bets”) will hit a growth phase.
- Alphabet still plans to make some significant acquisitions.
- Since founders have “only” 11% equity share vs. 51% voting power, they are motivated to keep cash in, just in case.
- Founders are just too slow to accept the reality that there is not a valid reason to accumulate so much cash anymore.
Alphabet is still growing quickly and therefore, needs more cash than a more mature company.
The first apparent reason is that it is natural to expect low dividend and buyback level for companies that grow significantly and invest a lot. Google is not a startup anymore. It is a big corporation, but its growth is still formidable. Its revenues are increasing by +20%, and for example, it expanded its headcount in 2018 by 19 thousand people ( +23%).
Alphabet needs cash in case one of its non-google projects (“Other Bets”) will hit a growth phase.
For a long time already, Google founders and management keep the narrative that they want to grow Alphabet Group to something bigger than Google. Google will be just one of many significant businesses. Problem is none of the Alphabet’s “Other Bets” really took off so far and got in the phase of fast growth and commercialization.
But if this was the idea, it was quite reasonable to hold back cash, because scaling the business would require a lot of investments. For example, Waymo, after uncertainty about its business model will clear out, might be a company that requires significant investment to take off. But hardly the level that Google can’t swallow right now. Therefore, this alone will hardly be the only reason.
Alphabet still plans to make some significant acquisitions.
Another argument might be the Alphabet needs the money for potential large acquisitions. Again, very valid reason, but political and regulatory climate nowadays, kind of rules out large acquisitions that would make Alphabet/Google, even more dominant player than it is now. And if we are talking only about mid-size acquisitions, current levels of cash are more than enough to cover that.
Since founders have “only” 11% share on equity and at the same time 51% share on votes, they are motivated to keep cash in just in case.
Another reason might be that Google’s founders Larry & Sergey that have majority voting power over Alphabet Inc. do not have any valid reason to give that cash away. By owning “only” 11% of equity, they are naturally motivated to keep money in to have control over it.
If you think about it, in their situation, it is natural to expect a very conservative approach in payouts. They will do it only if it is absolutely sure that the money won’t be needed internally. If they pay too much and something goes wrong, and they will be forced to raise money again, this will, with high probability, mean that they will lose control over the company.
I wrote a separate article focusing on Google/Alphabet ownership structure, and I highly recommend it if you are interested in checking out how Larry and Sergey control Alphabet.
To be clear, I am not a big fan of all those investors that complain about the founders of having too much power and that it is not fair. My view is that they negotiated to keep their control, and investors at the time agreed. So they have every right to be in control. However, this setup when you control business, and you only have a small percentage of it, have both benefits and flaws.
Founders are just too slow to accept the reality that there is not a valid reason to accumulate so much cash anymore.
The last reason I will mention is just that it took some time for founders to realize that Alphabet formidable growth to the current size also means that it is quite an easy target for politicians and regulators. That means that further significant acquisitions are not very probable. I think the founders already realized that, and that’s why we see a slow but very stable increase in cash being paid back to shareholders.
🔮 Will Alphabet Cash Payouts Change in the Future?
I think that expecting Alphabet to start paying dividends any time soon is not on the table, although it might quickly happen if founders change their minds.
We can, however, expect that cash payout will grow probably through cash buyback and not only in the absolute numbers but also as a % of net income. The reasons for holding large cash buffer that were valid a few years ago are not valid anymore.
Alphabet’s slow but stable increases in the amount of stock buyback in a couple of last years are a sign that Alphabets realizes this too.
📚 Resources & Links
Dividends and Buybacks - Fact and Fiction: Article by Aswath Damodaran, Professor Professor of Finance at the Stern School of Business at NYU.
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