Alphabet’s Cash Surge Sparks Dividend Expectations

Alphabet Stock NASDAQ:GOOG

Alphabet Inc. (NASDAQ:GOOGL) is amassing significant cash reserves, fueling expectations that it might emulate Meta Platforms Inc.’s (NASDAQ:META) playbook and commence paying dividends.

The tech behemoth has been funneling surplus cash into share repurchases for years, with many investors anticipating another $70 billion allocation when Alphabet reports earnings on April 25. However, analysts from JPMorgan Chase & Co. (NYSE:JPM) to Truist Securities are among those envisioning a modest dividend as a strategic move to enhance shareholder value, akin to Meta’s February dividend declaration that propelled a 20% surge in its shares.

Andrew Zamfotis, portfolio manager at Ami Asset Management Corp., commented that a dividend would be well received. He highlighted the importance of cost discipline and suggested that initiating a dividend indicates prudent capital allocation by management to balance growth and capital return.

Traditionally associated with mature and slower-growing firms, dividends have been gaining traction among tech giants. Apart from Meta, companies like Salesforce Inc. (NYSE:CRM) and Booking Holdings Inc. (NASDAQ:BKNG) have recently initiated dividend programs. Among the six largest US technology firms by market capitalization, Alphabet and Inc. (NASDAQ:AMZN) stands as the sole entities without a quarterly payout.

Alphabet’s shares have surged by 10% this year, outpacing Microsoft Corp. (NASDAQ:MSFT) and the Nasdaq 100 index. Increasing optimism regarding its AI-driven strategy has buoyed the stock, albeit it experienced a dip to a three-month low in March following a lackluster earnings report and concerns over potential challenges to its dominance in search advertising posed by AI tools.

With Alphabet’s revenue projected to climb by 14% this year and cost-cutting measures bolstering profitability, the company’s free cash flow is forecasted to reach a record $83 billion in 2024, as per Bloomberg data. By the end of 2023, the Google parent company held over $110 billion in cash and cash equivalents.

Tejas Dessai, research analyst at Global X ETFs, suggested that Alphabet is likely to emulate Meta’s strategy and introduce dividends this year. He noted the favorable advertising market and recent cost-saving measures, indicating that now is an opportune time for such a move, which investors have responded positively to.

While Alphabet faces various cash demands, such as expanding AI computing capacity, its record capital expenditures of $32 billion in 2023 are anticipated to surge by another 27% in 2024, according to Bloomberg data. Nonetheless, sentiment on Wall Street indicates that Alphabet possesses sufficient cash for infrastructure investments as well as substantial capital returns.

Rather than interpreting dividend initiations as a sign of dwindling investment opportunities, market experts now perceive them as indicators of financial robustness.

Jenny Harrington, chief executive officer at Gilman Hill Asset Management, pointed out that holding onto cash in the current environment is suboptimal for corporations. She emphasized that even with a 5% return on cash, the benefits of returning cash to shareholders through dividends or the boost from buybacks outweigh the gains from keeping cash reserves.

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