There’s A Strong Case For Google To Double Down On Share Repurchases

by Trefis Team
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Alphabet (NASDAQ:GOOG), the parent company of Google, has increased its share repurchases, allocating over $18 billion to buying back its shares over 2019, up from $9 billion in 2018.  However, the program has not reduced shares outstanding over the last few years, as buybacks have been more than offset by Google’s sizable share-based compensation. We believe that Google could meaningfully increase its share repurchase allocations going forward, considering its relatively high earnings yield versus its interest yield on cash, and the fact that its stock looks relatively undervalued. Moreover, the company’s cash pile has also been growing despite meaningful investments in research and development (R&D expenses 5-year CAGR of 21%) and so-called moonshot projects. While the company could also undertake larger acquisitions, buybacks might be viewed as a less risky way to boost its share price. (Related analysis: Here’s Why Tesla Is Worth $1.5 Trillion To Google) Below, we take a look at why Google could double down on its repurchases, and also compare its repurchase program to rival Apple, which has undertaken the largest repurchase program among U.S. companies.

View our complete dashboard analysis of Should Google Double Down On Share Repurchases?

Google’s has been increasing its allocation to its share repurchase program over the last few years

  • Google allocated $18 billion to buying back its shares over 2019, up from just $1.8 billion in 2015.
  • As a % of Free Cash Flows, the number has grown from 11% to 59%.

Why Google has a lot more room for doubling down on its share repurchases?

#1. Google’s Shares Outstanding has increased, despite its buybacks, due to rising Stock Based Compensation

  • Google’s weighted average share count (across its three classes of stock) has increased from 686 million to 693 million between 2015 to 2019.
  • This was due to growing stock-based compensation ($11.7 billion in 2019) which has offset the impact of the reduction in share count from repurchases.

#2. Google’s Cash holding is growing and the interest it earns on its cash is well below its earnings yield (EPS divided by average stock price)

  • Google’s cash holding has grown from $73 billion in 2015 to $120 billion in 2019, giving it more room to scale up its buybacks.
  • Moreover, the company’s Interest on its cash holdings is nominal, averaging less than 2% over the last 3 years.
  • In comparison, Google stands to earn more by investing in its own stock, which yields over 4% in earnings per year.

#3. Google stock also appears to be relatively undervalued, strengthening the case for a buyback

  • Google’s trailing P/E stands at under 25x, with revenue growth of 18% and margins of 21%.
  • In comparison, the S&P 500 trades at 23x with revenue growth of 6% and margins of 9%.

Apple’s repurchase program is significantly larger than Google’s

  • Apple has reduced its shares outstanding by roughly 20% over the last 4 years, powering its EPS growth.
  • Apple has been drawing down its cash holdings over the last 2 years, with repurchases standing at over 110% of free cash flows.
  • In comparison, Google’s repurchase expenses as % cash flow stood at 59% in 2019.

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