Alphabet (NASDAQ:GOOGL) is the undisputed titan of the online search business. As companies like it grow from nascent start-ups to technology giants, a transition often takes place from issuing shares to buying them back. So, is that the case with Google’s parent company?
Does Alphabet Buy Back Shares?
Alphabet’s Board of Directors approved a share repurchase scheme and spent $61.5 billion on buying back outstanding shares.
The company still has room left to buy more shares, as the repurchase authorization it announced last April amounted to $70 billion.
When Q1 results come out in the spring, it’s likely that this authorization will be renewed or possibly even increased.
Alphabet’s Share Buyback History
Alphabet began repurchasing shares consistently in Q2 of 2018, and the company has reduced its outstanding share count in every quarter since.
The total number of shares topped out at 15.04 billion, a number which has now fallen to 13.57 billion. All told, this amounts to a 9 % reduction in total shares in just over five years.
It’s also worth noticing that Alphabet has increased the rate of share buybacks as time has gone by. At the end of 2019, for example, the number of outstanding shares was down just 0.7% compared to the year-ago period.
By the end of 2022, the year-over-year decline in outstanding shares had advanced to 2.9%. This suggests that Alphabet’s management is prioritizing buybacks as a means of returning some of its cash to shareholders.
Can Alphabet Maintain its Share Repurchasing Program?
The rising pace of share repurchases raises the question of whether Alphabet can sustain its buybacks. Given that the company has nearly $120 billion of cash on hand and a strong operating cash flow, there’s little reason to think that management will be short of investment capital anytime soon.
Despite not wanting for cash, there is a chance that Alphabet could slightly reduce its future buybacks if management believes it can invest more productively in new growth initiatives. For example, the company has been investing in developing its own AI chips.
Last year, Alphabet announced a breakthrough in chip development that made it competitive with some of NVIDIA’s chips. Continued development of AI may take precedence over share repurchases if the company believes it can earn a higher return through internal investment.
Ultimately, though, the question appears to be less about whether Alphabet will continue to repurchase shares and more about how aggressively it will do so.
Even if management chooses to allocate a bit less cash to buybacks in order to focus elsewhere, the company is likely to keep repurchasing shares when prices are attractive.
What Will Alphabet’s Share Buybacks Mean to Investors?
In nearly every regard, share buybacks are a net positive for Alphabet investors.
By repurchasing shares, the ownership of remaining shareholders is gradually increased. This puts upward pressure on share prices and gives the company a productive way to deploy some of its cash holdings.
Assuming management continues its share buybacks, investors very likely will see a continued tailwind that will add to Alphabet’s already impressive momentum.
While investors benefit from the buybacks, they are also a sign that Alphabet may be reaching the point that it can no longer productively invest the cash it brings in.
This isn’t unusual for a company of Alphabet’s size. Indeed, the building of a sizable reserve of excess cash is beneficial for long-term investors as the company is less likely to face financial troubles during difficult times.
In the meantime, management can return some of this excess cash to shareholders through repurchasing.
It’s worth considering that, in Alphabet’s case, continued earnings growth and a healthy pace of share repurchases are actively coexisting.
As of Q4 reporting, the company’s net income was up 52% year-over-year. Net margins have averaged 24% over the past year, and earnings are expected to continue growing in the coming year. In many regards, Alphabet seems to be maturing without necessarily slowing down.
Have Buybacks Come at the Cost of a Potential Dividend?
One aspect of Alphabet’s share buyback program that may not be as positive for some investors, however, is the fact that it has generally been used as an alternative to dividends.
Rather than distributing earnings to all shareholders through quarterly distributions, Alphabet has chosen to concentrate ownership by gradually drawing down the number of outstanding shares. While this increases the value of remaining shares, it doesn’t allow investors to draw an income from Alphabet without selling their holdings.
That approach, however, may be nearing the end of its natural life. With the recent announcement that Meta would pay a dividend for the first time, speculation has arisen that Alphabet could follow the same path.
Mega-cap tech companies now have sufficient cash flows and reserves that rewarding shareholders with dividends is looking like an increasingly sensible move.
While Alphabet hasn’t made any noises about paying dividends as of yet, it’s possible that at least some capital could be shifted away from buybacks and toward distributions sometime in the next several years.
Is Alphabet Fairly Valued?
A final consideration with regard to share buybacks is whether or not a company’s stock is fairly valued. Buybacks make sense when share prices are at or below fair value, giving a company a good return on its own spending.
Companies that buy their own shares when they are overvalued, by contrast, ultimately overpay and thus invest their money poorly. In Alphabet’s case, however, this does not seem to be a major concern.
GOOGL currently trades at 21.3x forward earnings and a price-to-earnings-growth ratio of 1.3. Given the company’s strong financial position and decent remaining growth potential, it’s difficult to say that this is particularly expensive.
Earnings are also expected to continue growing at around 16.4% over the coming five years, giving Alphabet investors a fairly long runway of potentially higher share prices to look forward to.
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