Jonathan Greenberg – Reasons Why Google Ought To Order Up A Grande Dividend Similar to Starbucks Did
Google’s stock price tanked $34.41 on Friday as a result of a “disappointing earnings announcement.” Apparently 24% yr over yr revenue growth, which beat analyst estimates, was less essential to traders than its 1% earnings miss because of incremental expense associated with staffing up, which was incurred to fuel future growth.
Actually, at Google’s closing price on Friday, it was trading within spitting distance of what we at OCE Interactive would refer to as its “Average Experience Benchmark Price.” Average Experience Benchmark is the price at which the average company within the marketplace with a similar basic profile could be expected to trade given the market’s current likes and dislikes. This scenario is relatively shocking for a company that remains so dominating in its space.
Google’s problem appears to be that fewer and fewer traders are willing to classify it as a growth stock given the size of its earnings base and its still above average but slowing growth rate. Ironically, that’s the reason why traders penalized the company for spending more to support future growth. And at the same time, income-oriented traders remain sidelined because of the lack of a dividend.
For a lot more data on this topic, please examine .
Especially Today, Dividends could be a Sign of Strength
But there is a easy fix to this problem. Start paying a dividend! With more than $90 per share of money and powerful free money flow, the company can certainly afford to do so. Earlier this yr, Starbucks, which is expected to grow its earnings at a rate similar to Google’s 15-17%, came to the realization that although it expects to maintain above average growth, its growth prospects nevertheless were slowing. It responded by initiating a 25% dividend payout ratio. The stock didn’t sell off as many had feared. On the contrary, should you stripped away the systematic influence of the recent marketplace sell-off on its stock price, Starbucks’ P/E multiple really expanded.
Google should strongly consider following within the path of Starbucks. It can comfortably pay out 25% of its earnings within the form of a dividend. And given the money it has been accruing, this would unlikely influence its growth prospects. But management shouldn’t hide from the reality that it is maturing and as demonstrated by scanning OCE Interactive’s database of historical basic achievements, little precedent exists for a company its size sustaining growth north of 15% for more than a few years.
Based on this, we used our Marketplace Topographer platform to put Google’s stock price into historical context and to run a number of “what if” scenarios. OCE Interactive calculates that if Google were to introduce a 25% dividend payout ratio, even if growth were expected to slow to 12% a couple of years out, given today’s marketplace environment, its fair value could be within the range of $540 to $570 per share, a 16-22% premium to Monday’s close. Improving marketplace conditions or Google’s capability to sustain higher growth for longer would result in greater upside for traders.
For a lot more data on this topic, please examine .
Dividend policy aside, as the marketplace recovers, Google’s price will likely rise with the tide. But Google management should realize that paying a dividend isn’t a sign of weakness. Instead in today’s marketplace, it would add confidence that its money flows will remain powerful and should translate into a valuation premium. Most importantly, it will gain the company access to a growing, more stable universe of post-financial crisis traders who would love to own Google stock if it only paid a dividend. If Eric Schmidt needs any convincing, he should simply speak to Howard Schultz.
