Meta Platforms Initiates Dividend - Will Alphabet Follow Suit?

Published February 13, 2024

Meta Platforms (NASDAQ: META), the prominent social media giant, has taken a noteworthy step by announcing the disbursement of its first dividend to shareholders. The commencement of a quarterly dividend of $0.50 exemplifies a modest forward yield of 0.4%, yet it is a strategic move showcasing confidence in the company's sustained growth within its primary advertising segment.

This development raises the question: Could Alphabet (GOOG -0.99%) (GOOGL -0.99%), the parent entity of tech titan Google and a formidable player in the advertising domain, potentially implement a dividend strategy in the future? Examining Alphabet's trajectory of free cash flow (FCF) provides insights into this possibility.

Alphabet's Historical Stance on Dividends

Since its 2004 market debut as Google, Alphabet has never distributed dividends. True to the form of many expanding tech firms, Google rerouted most of its cash into bolstering R&D and strategic acquisitions rather than pursuing endeavors that are more overtly shareholder-centric such as buybacks or dividend payouts.

Highlighted amongst these acquisitions is the 2006 purchase of YouTube for $1.65 billion, which has since flourished into the largest online video streaming service and a key component of Alphabet's ad revenue generation. On the flip side, the company's foray into Motorola Mobility for $12.5 billion turned out to be less fruitful. Alphabet's ambitions aren't solely profit-driven in the short term; ventures like Waymo and Verily epitomize long-term bets on the company's diverse growth.

Alphabet's commitment to growth has historically paid dividends in performance, with a staggering 6,750% rise in stock value since its initial public offering (IPO) and consistent revenue and net income expansion over the years.

Alphabet Encounters a Slowing Growth Curve

Despite Alphabet's strong historical performance, there's evidence of slowing momentum in recent years. The tech behemoth is encountering headwinds in its primary revenue streams of advertising and cloud services, with intensified competition across the board from platforms like Meta's Facebook and Instagram, TikTok, as well as Amazon's expanding advertising arsenal.

In response, Google is diversifying by enhancing its subscription services and solidifying its position in the burgeoning field of artificial intelligence. Investments in services such as YouTube Premium and projects like Bard AI underscore this adaptive strategy.

Given Alphabet's significant increase in annual FCF and substantial cash reserves, there is financial leeway for dividend consideration; yet, the company has historically prioritized share repurchases. In 2023 alone, Alphabet allocated a massive $62 billion – roughly 90% of its FCF – to buybacks, reinforcing this preference.

The Question of Dividends for Alphabet

So, will Alphabet eventually begin distributing dividends like Meta? The concept isn't entirely far-fetched, yet it remains a low priority with expected modesty in potential payouts. Alphabet seems poised to continue fueling major share buybacks and to invest in its evolving landscape of subscription and AI innovations, diverting from the path of a classical dividend-paying blue-chip stock for the time being.

Meta, Alphabet, Dividend