I recently read an article celebrating Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) 21st birthday. In it, the author reeled off 21 reasons why Google stock was worth buying.
This article got me thinking about Alphabet’s need to buy back more Google stock despite the fact that the shares are up 21% in 2019.
Loads of Cash
The reality is that Alphabet’s primary breadwinners, Google search and digital display ads, are generating cash at a tremendous rate. GOOG could never comes close to spending it, given the cost-controlling talents of its CFO, Ruth Porat.
Alphabet finished the second quarter with $121.1 billion of cash, cash equivalents, and marketable securities. That works out to $175 per share of Google stock.
While Alphabet spends a lot of money on “moonshots” (highly ambitious technical initiatives), they won’t bankrupt the company anytime soon.
And while some wonder if the company’s earnings are slowing, a quick look at its Q2 results shows that it generated $9.2 billion of operating profits, triple what they were a year earlier. The company’s sales rose 19% year-over-year.
Clearly, Alphabet is growing rapidly.
Alphabet Can’t Spend All Its Money
Alphabet’s cash and cash equivalents, subtracted by its total liabilities, equals $80.72 per share or about $56 billion. Its operating cash flow over the last year was $50.8 billion, suggesting that its cash hoard will greatly increase going forward.
At the end of June, Alphabet had $4.1 billion of long-term debt or just 1.6% of its equity, an amazingly low debt/equity ratio. As a result of its excess cash, Alphabet ought to consider buying back more Google stock.
Usually, I’m not a big fan of share repurchases. In February, I suggested that buybacks should be illegal. However, since they are legal, there are certain situations in which they make a lot of sense.
One of them is when companies have too much cash, as is the case with Alphabet.
How Much More Google Stock Should Alphabet Buy?
Since January 2018, Alphabet’s board has authorized the company to buy $46.1 billion of Google stock. Through Q2, it’s repurchased $15.7 billion of its Class C stock at an average price of $1,121 a share. That works out to a little over $1 billion of share repurchases per month.
That’s a return on investment of 11.2% through October 21. While that’s not great, it’s a higher return than Google would have gotten from leaving its cash in bank accounts.
Alphabet still has $30.4 billion left on its share repurchase authorizations.
If it were to utilize the entire amount over the next 24 months, it could buy $1.3 billion of Google stock every month.
On three occasions since the beginning of 2018, the Alphabet stock price has risen to $1,200, only to fall back to around $1,000 within months. Timing the market is a difficult task. But buying Google when it falls to around $1,000 makes a lot of sense.
If GOOG generates $50 billion of free cash flow per year, and buys back $1.3 billion of GOOG stock per month, it would still have over $34 billion to use for Moonshots and acquisitions.
While it might not buy back this much stock, it ought to buy more than it is currently. That’s especially true when Alphabet stock price falls below $1,000
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
