When Will Google Pay a Dividend?

Apple’s (AAPL) massive cash pile may command the most attention (and speculation) from investors, but Tim Cook is hardly the only CEO building a war chest. Google (GOOG) now has nearly $70 billion in its coffers; its cash pile would be the 63rd largest company in the S&P 500 and enough to buy the entire Buenos Aires Stock Exchange. 

Because Google is wildly profitable, this stash is growing each quarter. So, naturally, there have been some calls for a dividend (though concerns about a stagnant stock price have been alleviated by recent results and the announcement of a corporate restructuring).

Google could initiate a substantial dividend quite easily; a payout of $5 billion annually would represent less than 20 percent of its operating cash flow. But, for a number of reasons, that scenario seems unlikely at any point in the next decade.

20,832: Number of R&D Employees

Nearly 40 percent of Google employees — more than 20,000 men and women — are now working on research and development. The company is on pace to spend $11 billion on R&D in 2015, or about $4 billion more than the NFL generated in revenue last year.

Data Source: 2014 Annual Report

Since 2010, the number of R&D employees at Google has more than doubled. Many of these employees are working on “moonshots,” or projects that Google calls “the gray area between audacious technology and pure science fiction.” Though information on moonshots is mostly confidential, some details have emerged. Ongoing projects at Google are rumored to include:

• Project Wing: a drone delivery service that could potentially be used in both emergency and commercial applications.
• Baseline Study: a molecular biology project that will collect genetic information from individuals with the goal of identifying biomarkers.
• Project Loon: high-altitude balloons that will deliver Internet service throughout the world.
• Titan Aerospace: lightweight, autonomous drones powered by photovoltaic cells that could be used to deliver Internet access to remote places.
• Calico: a company run by Apple’s chairman that is focused on extending the human lifespan.
• Project Contact Lens: a contact lens equipped with a wireless chip and miniature glucose sensor that can monitor blood sugar levels through the tears of diabetics.
• Self-Driving Car: this one is pretty much exactly what it sounds like.
• Liftware: a spoon that uses algorithms to determine the shaking of a person’s hand, and adjusts in order to stay balanced.

If these projects sound expensive, it’s because they probably are. Google spends about $93 million each day on research and development, and in its 2014 annual report executives indicated that R&D expenditures are likely headed higher:

We expect that R&D expenses will increase in dollar amount and may increase as a percentage of revenues in 2015 and future periods.

Google’s cash pile continues to grow despite the massive R&D expenditures, so none of the figures above make a dividend hard to fathom. But they do indicate a company that is aggressively investing in new technology and products, and more focused on long-term returns.

182: Number of Acquisitions to Date

Google doesn’t generally make headlines as an acquirer of other businesses, but it has been very active on this front; since 2010 it has purchased more than 125 companies.

While some of these takeovers relate to the core search business, it has also purchased companies focused on cloud computing, robotic arms, wind turbines, augmented reality, and artificial intelligence. Many of these businesses have been folded into the moonshot projects highlighted above, and no doubt account for a part of the R&D line item on Google’s income statement.

Again, Google has plenty of cash on hand to continue to fund acquisitions; most takeovers have been for less than $75 million in operating cash flow that Google generates each day. But if the company’s M&A division becomes more active and aggressive, the cash pile would start to dwindle quickly.

Below are five wildly speculative takeover targets for Google, shown as a percentage of the company’s current cash pile (and assuming a 10 percent premium would be required for each):

In this regard, Google’s cash pile hardly seems extravagant, especially if the company’s management is taking this Charlie Munger quote to heart:

It takes character to sit there with all that cash and do nothing. I didn’t get to where I am by going after mediocre opportunities.

For years, there has been speculation that Google will make a high profile acquisition. The current strategy has certainly kept that option on the table.

52: Percent of Brin and Page Voting Rights

The only number that really matters in a discussion over Google’s dividend, however, is 52. That’s the (approximate) percentage of Google’s voting rights held by co-founders Sergei Brin and Larry Page, thanks to the “super voting” rights afforded to them through their Class B shares (each of which allows them to cast 10 votes).

Data Source: SEC Filing

This  voting power is nothing new or backhanded; Page specifically cited the high level of control he would maintain — along with his co-founder — in the S1 they published prior to the 2004 IPO:

We are creating a corporate structure that is designed for stability over long time horizons…By investing in Google, you are placing an unusual long term bet on the team, especially Sergey and me, and on our innovative approach.

What this means is that the decision to declare a dividend rests with two individuals. And those two individuals seem unlikely to be influenced by Barron’s editorials or investor requests.

The introduction of a dividend would, of course, mean cash flow for the co-founders. A $5 billion annual dividend would translate into nearly $300 million in annual dividends — each. But Brin and Page aren’t exactly desperate for cash; in early 2015, they sold about $4.4 billion worth of company stock. And, more importantly, they don’t sound all that interested in returning cash to shareholders.

Larry Page, January 2013:

I feel like there are all these opportunities in the world to use technology to make people’s lives better. At Google we’re attacking maybe 0.1 percent of that space. And all the tech companies combined are only at like 1 percent. That means there’s 99 percent virgin territory.

Google’s 2014 annual report:

We won’t become complacent, relying solely on small tweaks as the years wear on. As we said in the 2004 Founders’ IPO Letter, we will not shy away from high-risk, high-reward projects because we believe they are the key to our long-term success. We won’t stop asking “What if?” and then working hard to find the answer.

Google CFO Ruth Porat, July 2015 conference call:

To date the weakest return on investment here has been in our core search business…again this underscores the power of smart targeted acquisitions.

We also have a strong track record of investment in new products as you know well and the infrastructure to support explosive growth…so trying to gauge whether or how capital returns fits in, it’s premature to do that and it’s really looking across these various potential uses.

Larry Page, August 2015 press release announcing Alphabet:

Sergey and I are seriously in the business of starting new things. Alphabet will also include our X lab, which incubates new efforts like Wing, our drone delivery effort. We are also stoked about growing our investment arms, Ventures and Capital, as part of this new structure.

Page and Brin are both just 42 years old. They’ve just passed off management of Google’s search business to Sundar Pichai, positioning themselves to dive in to the more exciting and forward-looking business of Alphabet. They have billions of dollars in the bank, and have repeatedly emphasized their long-term focus.

The similarities between the Alphabet structure and Berkshire Hathaway are obvious, so it is worth reviewing the dividend history of the latter:

(This is not an error on your screen; Berkshire Hathaway doesn’t pay a dividend.)

For all of these reasons, a Google dividend appears to be unlikely at any time in the next several years. The company’s founders have only scratched the surface of their vision, and seem intent on using the mountain of cash they’ve accumulated to dig deeper.

This article, When Will Google Pay a Dividend?, first appeared on Dividend Reference.