Why investors don't expect a dividend check from Alphabet anytime soon

Published Thu, Mar 2 202310:35 AM ESTUpdated Thu, Mar 2 202312:00 PM EST

Coming out of the Internet bubble in 2003, Microsoft implemented a dividend for the first time in its then nearly three-decade history. Over the next decade, the software giant slowly hiked that dividend annually, while its shares languished mostly in the 20s. But only in 2013 did investors start to anticipate a jump in earnings, driving Microsoft above $33 by the end of that year, en route to breakout annual gains of 40%, 24% and 19% between 2013-2015. Like Microsoft in the early 2000s, concerns have mounted in recent weeks over whether Alphabet shares may be entering a similar phase of prolonged sideways performance in the wake of renewed antitrust issues and fears that it's losing the Artificial Intelligence war . Shares of the Google parent have underperformed in 2023 relative to other tech stocks, up a little over 2%, while other tech megacaps Meta Platforms , Apple and even Microsoft have gained about 44%, 12% and 3%, respectively, through Wednesday. The tech-heavy Nasdaq Composite, meanwhile, is up nearly 9%. But despite the recent struggle in Alphabet shares, and fears over what lies ahead for the dominant search engine, big investors say a dividend isn't the best use of cash to convince investors to stay the course. GOOGL YTD mountain Alphabet shares so far this year "If you saw Alphabet paying a big dividend, I don't know if I would take that as a positive," said Paul Meeks, portfolio manager at Independent Solutions Wealth Management. "I might take that as a negative because then they're telling me that they've become a value stock. I want them to be a growth stock." Companies pay dividends for a multitude of reasons. For many, it represents a way to hold on to current investors by offering a return on investment, or even lure new shareholders. Or, in the case of growth companies that have slowed down, paying them to wait. At the same time, dividends show a company's financial prowess and offer a consistent payout for investors in trying times. "At some point in time, shareholders will say 'Well, look, I'm not making 20% a year on the equity anymore, why am I invested in it?," said David Neuhauser, chief investment officer of hedge fund Livermore Partners. "Providing either a buyback or dividend does a lot for certain shareholders that want to see some of that return on capital." Like some of its tech peers, Alphabet could pay a small dividend to "check the box for institutional investors," Meeks said. But he views an acquisition, such as an AI-focused business, as a better use of cash for the company near-term, and a way to advance its vision. Implementing a dividend isn't out of the question for many mature technology companies, but don't expect one from Alphabet for a few years, or at least until the volatile advertising market and AI concerns subside, said Robert Pavlik, senior portfolio manager at Dakota Wealth Management. "I think dividends are logical, along with share count reduction and possible acquisitions," he said. "Firms like Microsoft are essentially cash cows generating so much in the form of free cash flow that dividends are only a natural progression of their business." Reinvesting in growing the business so that earnings expand may serve as a better way for many technology companies to fuel further expansion, he added. Robert Bierig, a partner and portfolio manager at Harris Associates, views share repurchases as the next logical step for Alphabet before a dividend, given his firm's view that the stock is undervalued at prevailing prices and that current concerns weighing on the stock are overblown. Alphabet, he added, already trades at a mid- to high teens multiple on next year's earnings, and its core business alone sells well below a market multiple for an above average business. Although a dividend isn't completely off the table for Alphabet or other technology companies, management needs to tread carefully when implementing one, and ensure the payment is one investors can consistently rely on. "If anything, you want to be able to be starting to pay a dividend and actually increase the payout over time," Neuhauser said. "Last thing you want to do is commit yourself to a dividend and then all of a sudden retrench it." For its part, Microsoft has grown its dividend about 10% annually over the past five years.