Dividends are a sign of maturing companies, but may also be a diversion for investors amid hefty capital spending.
Alphabet Inc.'s surprise issuance of its first dividend is now putting the pressure on Amazon.com Inc. to follow suit, as it is now the last of the Big Tech companies that does not pay its shareholders a dividend.
Wall Street, of course, was pleased by the news late Thursday, which was buried on the second page of Alphabet's first-quarter earnings, which were also better than expected. Alphabet said it will begin paying a 20 cents-a-share dividend starting in June.
Alphabet is following the example set by Meta Platforms Inc., which stunned Wall Street in February in its fourth-quarter earnings when it said it would begin paying a dividend. Many investors started to wonder if Alphabet or Amazon would be next among the Big Tech giants to follow their lead.
In most cases, the beginning of a dividend is a sign of a maturing company that has reached middle age, and its big growth days are over. But both Facebook parent Meta and Google parent Alphabet are currently on a strong growth trajectory in both of their businesses, much of which comes from internet ads. But both are also increasing their capital spending to build up more AI infrastructure in terms of data centers, hardware and software.
Alphabet said it spent $12 billion in capital expenditures in the first quarter. In the first two quarters of 2023 it did not give numbers for its capital spending and in third quarter, it spent $8 billion. In the fourth quarter of 2023 it spent $11 billion, "overwhelmingly" on technical infrastructure. Alphabet Chief Financial Officer Ruth Porat said Thursday that capital spending throughout the year will "be roughly at or above the Q1 level."
It's entirely feasible that both Meta and Alphabet have decided to pay a dividend and boost their stock buyback plans as an investor diversion while they both continue to spend, spend, spend on AI build-up. In the case of Alphabet, especially, which has been seen as behind in AI by many on Wall Street, the company spent time on its conference call talking about the advances it has made with Gemini, the generative-AI chatbot it launched in 2023.
While Meta was able to cite some examples of how AI is boosting its ad performance, Alphabet Chief Executive Sundar Pichai touted Gemini's improvements as not costing as much as previously expected, and its improved latency. Making money from Gemini, he said, "will play out over time, but I feel we are well-positioned."
In after-hours trading, Alphabet shares soared about 12%, a gain of roughly $237 billion in market cap. If those gains hold through Friday, it would be the second-largest one-day market-cap gain ever for a U.S. company, and Alphabet would become the fourth U.S. company to reach $2 trillion in market cap, following Apple Inc. $(AAPL)$, Microsoft Corp. $(MSFT)$ and Nvidia Corp. $(NVDA)$.
Executives at e-commerce giant Amazon $(AMZN)$ are probably watching the scenario, and may be getting pressure from their investors clamoring for a dividend too. While Microsoft is its biggest rival in cloud services, Alphabet said its cloud-services business, combined with YouTube, will reach $100 billion in revenue at the end of the year.
Whether or not Amazon will succumb is the big question. Once you commit to a dividend, it is for the long run, and it is hard for companies to end those quarterly payments, no matter how small they may seem. The pressure is on.
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