Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) is one of but a few companies that has more cash on hand than it could ever put to good use. It has $86.3 billion in cash, of which about $52 billion of it is stuck overseas. What will Alphabet do with all that money to benefit GOOGL stock holders?
I think the first issue that needs to be resolved is whether there will be a tax repatriation holiday. As we know, current corporate tax rates in the United States are 35%.
There is talk that the Trump administration will cut the corporate tax rate to 15%, and that a tax repatriation holiday might even lower it to 10%. Were it only 15%, though, GOOGL would be able to plow $45 billion back into the United States, giving it a total cash stash of about $79 billion.
Not only that, GOOGL stock produces tons of free cash flow. As if $16 billion in FY15 wasn’t enough, it improved that to almost $26 billion in FY16.
Why Google’s Cash Matters
The thing about cash just sitting on the books is that, while it lowers the valuation of the company on an operational basis — I like to subtract net cash from market cap to value the business as Peter Lynch instructed — it also means that other metrics get worse. Return on equity, return on assets, return on investor capital and return on shareholder capital all get hurt the more cash sits around.
As it is, GOOGL stock allocated about 7% of its expenses to its “Other Bets” segment this last quarter. Alphabet is effectively throwing big money at eight or nine venture-type opportunities. It could certainly expand that amount and go willy-nilly like Amazon.com, Inc. (NASDAQ:AMZN) does but GOOGL stock management seems to want to be more mindful and efficient in deploying its capital.
An acquisition of some kind probably makes the most sense. The only question is what would GOOGL buy and how much would it be willing to spend.
What Should GOOGL Stock Spend It On?
M&A: Some pundits point to Shopify Inc (US) (NASDAQ:SHOP) as a possibility. This is a cloud-based multi-channel commerce platform that would make sense for Google, but I hate the fact that it is valued at around $8 billion, loses money every year and has negative free cash flow.
Another acquisition that has been suggested is Callidus Software Inc. (NASDAQ:CALD). This is also a cloud-based product, which “enables its customers to sell Lead to Money suite of solutions that identify leads, train personnel, implement territory and quota plans, enable sales forces, automate configuration pricing and quoting, manage contracts, streamline sales compensation, capture customer feedback and provide predictive analytics for competitive advantage.”
Again, this sounds like a fit for GOOGL, but again it is losing money and barely generates free cash flow. The good part is that the market cap is only $1.4 billion.
Share Buybacks: However, I’ll say that GOOGL stock is not terribly expensive. 99% of company share buybacks are used on stock that is outrageously expensive, which are a cynical and poor use of shareholder capital used to boost per-share earnings. As a GARP stock, however, for GOOGL to spend cash buying back stock, that would make perfect sense.
You want a company to buy back its stock when its stock is cheap. In fact, if the market corrects by 20% to 30%, which I expect, GOOGL should plow money into buybacks. I think it should also issue a dividend. I’m not crazy about that idea, because even if GOOGL stock falls to $700 per share, and repurchases 10% of its stock for $35 billion, a $1 per share dividend would only be a 1.5% yield.
To me, unless a company can quickly escalate payouts to 3% or more to attract dividend investors, the return of capital isn’t terribly attractive.
Content: Lastly, Alphabet Inc should plow money into a content-creation studio.
I’m not talking about the pathetic offerings of YouTube Red. I’m talking big. As in, start up a studio like the other big ones and make totally original and fresh programming. After all, content is king.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he had no positions in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
