Google-owner Alphabet (GOOG:NASDAQ) shocked the market with a first-quarter announcement that it plans to kick-start regular quarterly dividends. In February 2024, Meta Platforms (META:NASDAQ) made headlines with its own dividend announcement, joining Apple (AAPL:NASDAQ), Microsoft (MSFT:NASDAQ) and Nvidia (NVDA:NASDAQ) in committing to quarterly shareholder payouts, and Alphabet’s move means five of the so-called ‘Magnificent Seven’ big tech stocks will pay dividends in future.
Alphabet’s initial $0.20 per share payout implies a tiny yield of just 0.2%, but there is scope for rapid payout growth in future. It will leave just Amazon (AMZN:NASDAQ) and Tesla (TSLA:NASDAQ) of the seven without any commitment to dividends.
It marks a major transition for big tech as their respective businesses mature, with major job layoffs and tightened spending plans having been pushed through since 2022.
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Every major tech firm announced layoffs and tightened spending beginning in 2022. Investors rewarded those efforts and have shown a similar reaction to share buybacks and dividend initiations. When Meta announced its first ever dividend in February, it helped send shares soaring more than 14%. The response to Alphabet’s plans was similar, sending the stock surging around 10% to register an all-time of $173.69 (26 April).
As with Meta, Alphabet has previously returned cash to shareholders via hefty share repurchases. In 2023, the internet search giant spent $61.5 billion on share buybacks as profits rose.
But changes to US corporate tax rules may be a factor in big tech rebalancing shareholders returns towards dividends and away from share buybacks. Buybacks now incur a 1% tax as the US government continues to grapple with its budget deficit. This could rise to 4% if changes proposed last year are pushed through.
However, Alphabet’s announcement that it also plans to buyback up to $70 billion worth of stock going forward suggests this line of thought may be less meaningful than answering the simple question of what to do with the enormous amounts of cash sitting idle on major tech firms’ balance sheets. According to Stockopedia data, Alphabet, Apple, Meta, Microsoft and Nvidia have more than $345 billion of cash on deposit.
Putting this monumental capital to work is not easy given the reluctance of regulators to allow major tech firms to pursue significant acquisition strategies for fear of unfairly tilting the competition scales away from smaller tech firms.
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