Yahoo! Is Out of Reasons for Not Paying a Dividend

NEW YORK (TheStreet) -- Yahoo! (YHOO) needs to incorporate the Apple (AAPL) model of buying back shares and raising its dividend. Yahoo! is cash-rich and about to enjoy another Alibaba-fueled payday, and yet it doesn't pay a dividend.

Marissa Mayer, Yahoo!'s CEO, has been at the helm for almost two years and to date the most remarkable company achievement is the rate Yahoo! is buying other businesses. Mayer has spent more of the war chest in acquisitions during the first 16 months than the previous 16 years before her. So far, Tumblr ranks as the largest for $1.1 billion.

YHOO Shares Outstanding Chart

Using some of the cash hoard towards making shareholders rich instead of more startup owners will do a lot more to boost the share price. Buying Web properties the company will struggle to monetize is a difficult proposition for me to get my head wrapped around when the core brand is far from executing efficiently.

In other words, buying company after company is a waste of money until Yahoo! can get its own house in order. A smaller problem is easier to fix than a larger one. Yahoo! doesn't need more Web sites missing vowels in their names. It needs to effectively compete with Google (GOOG) and Microsoft (MSFT) first. Then, after all eight cylinders are firing properly, expand prudently as opportunities become available.

Google continues to run circles around Yahoo!, although Yahoo! Ad Manager is quickly slowing the pace Google laps Yahoo! in selling ads. Yahoo! Ad Manager is a few years late to the game, but at least smaller advertisers are able to self-serve ads into the Yahoo! network. How many know they can do this is another question altogether.

The piece, and this is critical, is the ability for Web sites to sell ads into the Yahoo! network. If Yahoo! wants to take a piece of Google's virtual monopoly and highly lucrative small-site publishing ad network (and Yahoo! should), small Web sites need to easily enter and navigate Yahoo!'s ad network.

So far, it appears Yahoo! has its work cut out. I went to sign up my personal Web site and at the end of a longer than necessary process to find out if I would be approved, I finally reached a page that stated:

"Due to continued high volume of interest, we currently have a backlog, and hence it may take us up to 1 week to get back to you on the status of your invitation request."

"PLEASE NOTE

(1) We are issuing a limited number of accounts daily. Due to the extremely high volume of interest in the program, we currently have a backlog, and hence it may take us up to 1 week to get back to you on the status of your invitation request.

(2) Each website that you have submitted is individually reviewed by us for approval. There are several factors including advertiser demand, that determine which websites get approved and the order in which we process invitation requests. We will do our best to get back to you as soon as possible."

So my first experience working with Yahoo! is that it may take a week just to find out if it will take my site as a publisher. Apparently, Yahoo! fails to understand that between now and a week from now I will have already signed up for Google AdSense and have the appropriate code to display their ads.

If I do become approved for Yahoo! ads, why in the world would I then take the time to change the Google HTML code to replace it with Yahoo! code? There's an old saying in business that if you don't have the time to take care of your current customers, how will you have time to take care of more? It's as true today in an online world as it was when it was coined.

Yahoo! has never understood that basic rule of business, and after almost two years of Mayer leading it appears it still doesn't. That's why I think the company's best use of capital is to pay a dividend and use its resources to fix what it already has instead of further expansions. The market has clearly voted that it has all but totally lost faith.

Operationally, Yahoo! YHOO is almost free after removing investment holdings. Yahoo! shares more in common with investment firm Icahn Enterprises (IEP) than it does with Google and Microsoft. During the last earnings report, the share movement was reflective of its investments more than its online market share.

Alibaba's market cap valuation may exceed $160 billion. That's $36.8 billion pretax. Yahoo! is expected to own a sizable portion after Alibaba's IPO. We also don't know how effective the bean counters will mitigate Yahoo!'s capital gain exposure for the Alibaba stake sold during the IPO. Allowing for tax and other deductions, at $160 billion market cap, Yahoo!'s valuation is increased by about $26 billion.

The 35% of Yahoo! Japan that Yahoo! owns is worth about $5.4 billion and is sitting on another $1.6 billion in liquid assets. Added together, the investments are worth in the neighborhood of $33 billion. Yahoo!'s total market cap is less than $36 billion at Monday's close.

In other words, Yahoo!'s core business is worth only about three times what Tumblr sold for to Yahoo!. Paying a dividend will bring in funds and investors that limit their investments to dividend payers. Paying a dividend will reward long-term holders who have waited an eternity to get a piece of the pie that management has received for years.

In February, I advised investors to buy Yahoo! because the market was overly discounting the growth potential. At the time, Yahoo! was over $38, and the shares have become even cheaper since on a cost of earnings basis. Since management is failing to excite Wall Street on its growth prospects, it no longer has a reason not to pay a dividend.

At the time of publication the author had no position in any of the stocks mentioned.

Follow @RobertWeinstein

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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