Specifically, Google is in a great position to start rewarding shareholders with a dividend and stock repurchase program. I expect both to be announced this year. These moves could provide a much-needed boost to Google’s stock in 2015.
Since Google’s IPO, Pichette had served as the CFO for seven of the company’s 10-plus years as a public company. And he’s done a great job managing Google’s finances during a time of rapid growth for the company.
Under Pichette’s leadership, the company has used its financial flexibility to execute big M&A transactions. Two years ago he commented, “It serves the shareholder best to actually have that strategic ability to pounce.”
Historically, Google has chosen to use its cash to buy companies. Some of the more notable acquisitions have included DoubleClick, Nest, Songza, YouTube and Zagat.
At the end of 2014, Google was sitting on $58.7 billion of cash and marketable securities. The company is nearly debt free, with just $5.2 billion of loans. That means that the company’s net cash position equals 14% of the current market capitalization.
The highly profitable company does a great job at generating cash. As a result, an analyst at Bernstein Research expects that Google’s cash position will grow to more than $100 billion by the end of 2016.
That creates “rich company” challenges for Google. Of course, these are good problems to have. And they’re the result of the company’s amazing success.
A new CFO may have different views on the best way to deploy the company’s billions in cash. While M&A will remain a priority, supporting the stock price will also be important.
One pressing issue is Google’s stock performance. Over the last year, Google shares are down 7%. The stock has greatly underperformed the Nasdaq Composite, which has posted gains of 14% over the same period.
Google Stock Lags the Nasdaq Composite
Poor stock performance can be a big negative for a company like Google. Tech companies often attract talent with the promise of stock options. Those options become more valuable if the stock price is rising. Meanwhile, a languishing stock price can make it difficult to attract and retain top talent.
The execs at Google know that a falling stock price is bad for the business. You may recall that in recent years, both Apple (NASDAQ: AAPL) and Facebook (NASDAQ: FB) faced problems when their share prices were falling.
Pichette recently commented on this, saying, “I just can reiterate the same message that I give on a regular basis, which is share price does matter. It matters to our board. It matters to all of us. … We do review this issue on a regular basis.”
A dividend and share repurchase program would help boost Google’s stock price.
First, by initiating a dividend, mutual funds and ETFs with an income-investing mandate would be able to buy the stock. That alone could greatly expand the universe of potential investors in the stock.
Second, a share repurchase program would reduce the number of shares outstanding. This would have the positive effect of increasing EPS, providing another reason for the stock price to rise.
Google shares are now trading around $575. The shares trade at a P/E multiple of 19 times 2015 EPS estimates. That’s a premium to the S&P 500. But considering Google’s healthy 15% growth rate, the valuation is justified.
The fact is that Google has more cash than it needs. I’m optimistic that the company will initiate a dividend and share repurchase program in 2015.
If the company fails to act on its own, look for activist investors to step in. You’ll recall that it was David Einhorn, Carl Icahn and other vocal investors whose efforts pushed Apple CEO Tim Cook to return cash to shareholders.
Solid growth, a reasonable valuation and the potential for a dividend and repurchase make Google shares attractive today.
Full Disclosure: Ian Wyatt currently owns shares of Google (NASDAQ: GOOGL).
This article is brought to you courtesy of Ian Wyatt from Wyatt Investment Research.