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A First for Alphabet in Q1 Earnings

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There has been a bit of a trend this year among the Magnificent Seven stocks. In February, Meta Platforms (NASDAQ:META) introduced its first-ever quarterly dividend, and now Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) has followed suit.

On Thursday in its first-quarter earnings report, Alphabet announced that it will distribute a dividend for the first time. The 20-cent-per-share quarterly dividend will be payable on June 17 to shareholders of record as of June 10.

Alphabet offers its first-ever dividend

Investors should know that it is by no means a huge yield that Alphabet is offering, as the 20-cent-per-share dividend at roughly $170 per share results in a yield of about 0.5%. That is well below the roughly 1.5% average dividend yield in the S&P 500.

However, this move is significant as it will provide some additional income or total return for investors, and it shows that the company is moving to the next phase of growth. Growth stocks tend to eschew dividends, as such companies typically invest any excess capital in future growth.

Thus, while the major companies from the PC revolution, namely, Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT), have long since paid dividends, the Big-Tech names that popped up in the internet age mostly have not.

However, some two decades after they launched, some of the major internet companies are finally beginning to return some of their excess cash to shareholders. After Meta and now Alphabet, only Amazon (NASDAQ:AMZN) and Tesla (NASDAQ:TSLA) are the remaining two Magnificent Seven companies not offering dividends, and many believe Amazon will soon be paying a dividend, perhaps even some time this year.

Of course, investors shouldn’t expect high yields from these tech companies, as they tend to be on the lower end of the spectrum and will probably stay there. For example, Microsoft has a yield of about 0.73%, Apple pays out a 0.55% yield, and Meta has a 0.46% yield — all well below the average in the S&P 500. The dividend yield shows how much a company pays out in dividends as a percentage relative to its stock price.

In addition to the dividend, Alphabet authorized $70 billion in share repurchases.

“The core of our capital allocation framework remains the same, beginning with investing aggressively in our business as you have heard us talk about today, given the extraordinary opportunities ahead,” said Alphabet President and Chief Investment Officer Ruth Porat on the company’s earnings call. “We view the introduction of the dividend as further strengthening our overall capital return program.”

Strong Q1 results lift Alphabet stock

The new dividend was one of the highlights of a strong Q1 earnings report for Alphabet, as its revenue surged 15% year over year to $80.5 billion while its net income rose 27% to $23.7 billion, or $1.89 per share. Further, Alphabet’s operating margin rose to 32% from 25% during the same quarter a year ago.

Google Services revenue rose 13.5% to $70.4 billion, and that includes search, YouTube, advertising and subscriptions. The cloud business saw a 30% revenue gain to $9.6 billion.

For the full fiscal year, Alphabet expects to expand its operating margin over last year’s margin and continue to invest quarterly in capital expenditures at or above the $12 billion it spent in Q1. The capital will be used to upgrade its technology infrastructure, reflecting the opportunities it sees in AI across its business.

“Our results in the first quarter reflect strong performance from Search, YouTube and Cloud. We are well under way with our Gemini era and there’s great momentum across the company. Our leadership in AI research and infrastructure, and our global product footprint, position us well for the next wave of AI innovation,” said CEO Sundar Pichai on the earnings report.

Analysts are bullish

Analysts were bullish on Alphabetʻs earnings report, as it received roughly a dozen price-target increases, including from Barclays, which raised its target to $200 per share. Alphabet is currently trading at around $170 per share.

“Google is in the sweet spot of accelerating growth, expanding margins while shipping product faster, and returning capital — basically proving the naysayers wrong,” Barclays analysts wrote in research note last week, according to CNBC. “The momentum should stay strong for a while here.”

Alphabet stock is up roughly 22% year to date and is trading at a relatively low valuation of 25 times earnings, which is within its recent range and below the Nasdaq 100’s average P/E multiple. Thus, Alphabet looks like a solid buy right now.