Source: PaxForex Premium Analytics Portal, Fundamental Insight
Meta Platforms, the largest social media company globally, surprised investors recently with its inaugural dividend initiation. Although its quarterly dividend of $0.50 results in a modest forward yield of 0.4%, this move demonstrates confidence in the sustained growth of its core advertising business.
This raises the question: could Alphabet, the parent company of Meta's major advertising rival Google, follow suit and introduce dividends in the near future? To explore this possibility, let's delve into Alphabet's free cash flow (FCF) growth.
Since its 2004 IPO when it went public as Google, Alphabet has refrained from paying dividends. Similar to many expanding tech companies, Google directed a significant portion of its cash toward research and development (R&D) investments and acquisitions rather than pursuing shareholder-friendly buybacks or dividends.
Several major acquisitions proved fruitful. The purchase of YouTube for $1.65 billion in 2006, for example, transformed it into the world's leading streaming video platform and a key growth driver for its advertising segment. However, not all acquisitions yielded positive results; the $12.5 billion acquisition of Motorola Mobility resulted in unfavorable write-downs. Furthermore, Alphabet's ventures into "moonshot" investments, such as its driverless unit Waymo and healthcare unit Verily, were focused on long-term growth rather than immediate profits, strategically positioning the company beyond digital ads.
For an extended period, Alphabet prioritized expanding its business over shareholder buybacks or dividends, a strategy that proved successful. Between 2004 and 2023, the company achieved an impressive compound annual growth rate (CAGR) of 27% in annual revenue and a 32% CAGR in net income. This robust performance translated into a remarkable 6,750% surge in its stock since its IPO.
However, Alphabet has experienced a gradual slowdown in growth in recent years. Between 2019 and 2023, its revenue and net income achieved compound annual growth rates (CAGR) of 17% and 15%, respectively. Analysts anticipate a further deceleration from 2023 to 2026, with expected CAGRs of 11% for revenue and 14% for net income. Although these growth rates remain noteworthy, Google may be reaching saturation in its core advertising and cloud businesses.
The intense competition in the advertising space, where Google faces rivals like Meta's Facebook and Instagram, ByteDance's TikTok, and Amazon's integrated ads, presents challenges. Additionally, Google's cloud platform trails behind Amazon Web Services (AWS) and Microsoft Azure, both aggressively enhancing their integrated AI features.
In response, Google is diversifying its revenue streams by expanding subscription-based offerings for YouTube, YouTube Music, and Google One. To stay competitive in the AI arena against Microsoft and Amazon, Google is making substantial investments in the development of its Bard AI chatbot, Gemini large language models, and other AI features.
Given these strategic initiatives, it is logical for Alphabet to allocate more funds to these endeavors rather than committing to recurring dividends. Despite an impressive rise in annual free cash flow (FCF) from $31 billion in 2019 to $69 billion in 2023 and an increase in FCF margin from 19% to 23%, analysts project annual FCF to reach $109 billion in 2026.
While Alphabet has not paid dividends, it engaged in substantial share buybacks, repurchasing 11% of its shares over the past five years. In 2023 alone, it spent $62 billion, nearly 90% of its annual FCF, on buybacks. This, coupled with its $111 billion in cash and marketable securities, challenges the notion that Alphabet lacks the resources for dividends. Rather, it underscores the company's belief that buybacks are a more effective means of enhancing shareholder value and mitigating dilution from stock-based compensation.
The strong performance of Alphabet's stock, with a 165% rally over the past five years, further supports the effectiveness of its buyback strategy. Well-timed buybacks can significantly boost earnings per share (EPS), offering advantages over dividends that provide regular cash payments but do not reduce outstanding shares or boost EPS. Buybacks are also generally more resilient to inflation and more tax-efficient, as investors are taxed only on dividends.
Alphabet might eventually follow Meta's example and introduce dividends, but it is unlikely to be a top priority, and the payout is expected to remain modest. Currently, Alphabet seems poised to continue directing its cash towards substantial buybacks and the expansion of subscription and AI services. This strategic choice aligns with the company's focus on staying competitive in the long run, prioritizing industry leadership over quarterly dividends.
As long as the price is above 140.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 143.51
- Take Profit 1: 150.00
- Take Profit 2: 155.00
Alternative scenario:
If the level of 140.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 140.00
- Take Profit 1: 135.00
- Take Profit 2: 130.00
