© Reuters. FILE PHOTO: Alphabet Inc’s Google brand logo can be seen outside its Beijing office
By Paresh Dave, Subrat Patnaik and Lewis Krauskopf
(Reuters) – In announcing a $ 50 billion share buyback on Tuesday, the owner of Google Alphabet (NASDAQ 🙂 Inc confirmed a paradoxical dynamic: Its core advertising business is so profitable, and so dominant, that ‘he has few options to usefully deploy his cash.
Alphabet reported record profits on Tuesday, leaving cash flow at around $ 135 billion, up $ 18 billion from last year.
An increase in internet use during the pandemic has helped propel Google search and the YouTube advertising companies which account for most of its revenue and profits.
But antitrust investigators in the United States and elsewhere say Google has gained dominance in online advertising using anti-competitive practices, and lawsuits are on the rise. This could leave Google hesitant to spend its money on large acquisitions related to its existing business, as they would likely be blocked for antitrust reasons.
“Fears of an intensified regulatory crackdown on the company might have seen Alphabet be more cautious in deciding what to do with its cash stack,” said Samuel Indyk, analyst at uk.Investing. com.
Alphabet’s financial director Ruth Porat did not rule out making deals on Tuesday.
“Our primary use of capital continues to be to support the organic growth of our business and then to maintain flexibility for acquisitions and investments,” she told analysts.
Betting on unrelated companies, while easier from a regulatory standpoint, would likely not produce anything comparable to the returns Google enjoys. And spending on internal projects also has limits: Alphabet has plunged tens of billions of billions into its “other bets,” including autonomous vehicle company Waymo and blue sky projects such as the failed internet service Loon. , but few are close to being viable businesses.
Like many fast-growing tech companies, Alphabet never paid a dividend, instead preferring to return money to shareholders through buybacks. Alphabet repurchased $ 31 billion of shares in 2020, 69% more than the previous year, according to Jefferies (NYSE 🙂 analyst Thill.
The 2020 buyout represented 73% of its free cash flow, up from 59% in 2019, he said.
Unlike dividends, which can lock a company into long-term fixed payments to shareholders that are difficult to reduce, buybacks also give Alphabet the flexibility to adjust the cash flow returned to investors at any time if it needs to. money for other purposes.
Some analysts say Alphabet shares are inexpensively priced relative to their peers. Alphabet shares are trading at around eight times sales over the past year, while shares of Facebook Inc (NASDAQ 🙂 are 10 times and Microsoft Corp (NASDAQ 🙂 at 12 times.
Pulling some stocks off the market and raising prices with the buyout, one of the largest ever on Wall Street and nearly twice the company’s previous highest clearance, could help close the gap with rivals .
“This (buyout) is a sign that their stocks are undervalued and a stricter regulatory environment for mergers and acquisitions,” Thill said. Alphabet shares rose 6.1% to a record high of $ 2,431.38 on Wednesday.
Company executives would benefit from higher shares as part of their new compensation plans. Five senior executives, including Porat, over the past year have received stock awards that will vest, if any, based on how Alphabet’s shares perform against the S&P 100 in the coming years.
Alphabet is far from the only company with a lot of money, antitrust, and other challenges hampering its potential use. Apple Inc (NASDAQ :), Amazon.com Inc (NASDAQ :), Microsoft Corp and Facebook Inc have combined over $ 300 billion.
Share buybacks have increased, both in terms of buybacks and the number of companies doing them, although activity remains below pre-pandemic levels.
About a third of companies released quarterly results Tuesday, reporting $ 52 billion in first-quarter buybacks, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. These companies reported $ 42.8 billion in fourth quarter buybacks.
The calculation of redemptions versus dividends could change with US President Joe Biden’s new tax proposals, which seek to increase the capital gains levy on equity investments while leaving taxes on dividends and interest unchanged.