It should not go unnoticed that since the 2009 low, Alphabet (GOOG) and Microsoft (MSFT) have had essentially the same change in their stock price. However, unlike GOOG, Microsoft has paid a dividend the whole time that GOOG has been publicly traded. This means that Microsoft has been crushing it in the department of total returns.
Percentage change without dividends since March 9, 2009:
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MSFT: +1,056%
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GOOG: +808%
Percentage change with dividends since March 9, 2009:
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MSFT: +1,397%
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GOOG: +808%
Though they don’t directly compete on all levels, GOOG appears to be the superior more formidable upstart, by comparison. Which begs the question, what would the valuation levels for GOOG have been if they paid the same dividend as Microsoft since going public?
Below we explore the levels that GOOG would be considered undervalued or overvalued if it paid exactly the same dividend as Microsoft from 2004 to 2020.
Altimeter
The Altimeter is a calculation of price relative to dividends. It is very consistent over time although less so with high tech companies. For this reason, a tech stock can and does exceed the overvalued targets but is reined in with dramatic declines in short periods of time.
Undervalued and overvalued levels based on Altimeter since 2004 are reflected in the chart below.
According to the Altimeter, as devised by Edson Gould, GOOG is at or near the overvalued range and should not be acquired at the current prices.
Dividend Yield Profile
All dividend paying companies traded in a historical range from undervalued to overvalued and then back to undervalued.
If GOOG paid a dividend that was based on what MSFT had paid since 2004, then GOOG would have an overvalued dividend yield of 0.14% and an undervalued yield of 0.29%.
So far, GOOG is trading near the higher end of the presumed yield range. That doesn’t mean that GOOG is a sell, it just means that the stock isn’t a buy at the current price.
The question is, if GOOG isn’t undervalued, at what price would Alphabet be at if it were yielding a presumed 0.29%? Below we have the expected price targets for Google over the next ten years based on the Altimeter. We’ve chosen the Altimeter because it is so closely aligned with the dividend yield profile.
Conclusions
Alphabet has passed the phase of being the scrappy upstart ready to topple the Microsoft empire. Instead, it is a shared world of domination for both companies.
Eventually, GOOG is going to start paying a dividend. Initially, the dividend will be low on a yield basis but the rate of increases will be exceptional on a year-over-year basis. GOOG will be paying a dividend that is in line with the dividend that is currently paid by Microsoft.
For this reason, we don’t believe that the use of Microsoft’s dividend history applied to Google is such a far out concept. Especially when GOOG has had difficulty in beating the price performance of MSFT since the 2009 low.
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