Google Inc. (GOOG) shareholders are urging the Web-search giant to take a page from Apple Inc. and return part of its $44.6 billion in cash to investors.
Google has more cash as a percentage of market value than five of its largest peers, including Apple, which reinstated a dividend and unveiled a $10 billion stock buyback last month. Google’s cash has almost doubled since 2009, and it is the only U.S. technology company with a market value of more than $125 billion that doesn’t offer a regular shareholder payout.
A dividend would be a boon to Google investors who have endured a 1.5 percent stock decline this year. Though Google’s purchase of Motorola Mobility Holdings Inc. (MMI) for $12.5 billion will eat into its cash pile, the company is adding about $2 billion to $3 billion in cash a quarter. Even after the deal is approved, Google will still have more cash than International Business Machines Corp. and Intel Corp. combined.
“There’s a pattern here that makes sense, and I’m sure Google will figure out the right thing to do,” said Michael Holland, chairman of Holland & Co., a New York investment firm that oversees more than $4 billion in assets, including Google shares. “It’s a little bit of a victory dance, if you will, to be able to have the sort of cash surplus that a company like Apple (AAPL) does and Google does. To share some of it is sharing the victory dance.”
Google could make an argument for holding on to its cash, by saying it needs the money for deals or investing in new businesses. Still, a dividend or buyback could assuage investor concerns that Google might instead make an unneeded, large acquisition, said Tim Ghriskey, who as co-founder of Solaris Group helps oversee about $2 billion in assets, including Google shares.
“Certainly, Google can afford it,” Ghriskey said.
The company’s cash could get a further boost from rising sales and earnings. Mountain View, California-based Google may report later today that first-quarter profit before certain costs increased to $9.64 a share from $8.08 a year earlier, as the company benefits from spending on search-based Web advertising, according to analysts’ estimates compiled by Bloomberg. Revenue, excluding sales passed on to partner sites, is projected to climb 24 percent to $8.14 billion.
Google Chief Executive Officer Larry Page, when asked last week about what the company might do after his competitor’s dividend announcement, said, “I think Apple has more cash than we do,” according to an interview with Bloomberg Businessweek. He said the company had nothing to announce.
Google’s board has discussed what to do with the cash, including buybacks, Chief Financial Officer Patrick Pichette has said on past calls with analysts. Today’s earnings call will provide analysts their first opportunity to revisit the question since Apple announced its dividend.
Apple, whose market capitalization is almost three times the size of Google’s, in March announced a quarterly dividend of $2.65 a share, along with the stock buyback. The maker of the iPhone and iPad tablet -- rivals to products based on Google’s own Android mobile software -- had amassed $97.6 billion in cash as it rolled out best-selling products under co-founder Steve Jobs.
IBM, the world’s largest computer-services provider, had $11.9 billion in cash and equivalents at the end of 2011, while chipmaker Intel said it had $14.8 billion. Microsoft Corp. (MSFT), the biggest software maker, had $51.7 billion in cash and equivalents at year’s end, and Oracle Corp. had about $30 billion as of its most recent quarter. All of these companies already pay a dividend.
Competing With Apple
“Google wants to hold the cash,” said Lee Pinkowitz, an associate professor at Georgetown University. “They haven’t paid a dividend, and they don’t really seem all that excited to.”
Indeed, Google isn’t amassing cash at the same rate as Apple, as it devotes a bigger slice of sales to capital spending, including data centers that power Web services, said Tony Ursillo, an analyst at Loomis, Sayles & Co., which has about $162.2 billion under management. Google may need cash to continue competing with Apple in mobile computing, he said.
“Google is not as cash-rich as Apple is,” Ursillo said. “Google probably sees a number of other necessary outlets for its cash that take a higher priority than paying a dividend.”
In addition, Google has much of its cash tied up overseas, letting it avoid tax penalties for returning the holdings to the U.S., while domestic cash is where the dividend will be paid from, Ursillo said. At the end of last year, $21.2 billion of Google’s $44.6 billion of cash, including equivalents and marketable securities, was held by its foreign subsidiaries, according to a company filing. That will dwindle after the Motorola Mobility purchase.
Google has been “pretty successful” with acquisitions, said Jason Helfstein, an analyst at Oppenheimer & Co. For example, the company has emerged as a dominant force in mobile software thanks to its purchase of Android in 2005. It’s also benefitted in display advertising and user growth from its acquisition of video-sharing site YouTube in 2006.
Before the Motorola Mobility purchase, which is still awaiting final regulatory approval, cash holdings may rise to about $55 billion by the end of the year, according to Helfstein. The company should continue to put its cash to use, including through potential acquisitions, Helfstein said. Still, a small dividend -- perhaps distributing about $1 billion a year to shareholders -- would help draw new investors, he said, as some funds only buy stocks with dividends.
“It wouldn’t cost them much and it would probably help the valuation of the stock,” he said.
Whatever Google decides in the immediate future, Apple’s payout means the Internet search leader and other young technology companies may have to rethink how they handle their cash.
“Decades ago, we used to be worried about companies taking on too much debt,” said Ryan Jacob, manager of the $45 million Jacob Internet Fund, which includes Google shares. “Now, we’re worried about companies taking on too much cash.”
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