Google Ripe for a Stock Buyback or Dividend

Google (GOOG) is a prime candidate to return some of its $30.1 billion in cash to investors through a stock buyback or dividend, according to shareholders and data compiled by Bloomberg.

"I don't think Google or anyone else can make a strong argument that they need $30 billion," says Ken Smith, a portfolio manager at Munder Capital Management in Birmingham, Mich., which holds Google shares. "I'd rather have the cash in my own pocket than have all of it sitting on the balance sheet."

Google, owner of the world's most popular Web search engine, tops a list compiled by Bloomberg of large companies best positioned to pay a first-time dividend, based on such measures as sales growth and return on equity and assets. The decision to hang on to cash instead of using it to reduce the number of outstanding shares is a "drag on earnings growth," Benchmark Co. analyst Clayton Moran wrote to investors last week.

With a dividend or buyback, Google would join other U.S. technology companies that have returned cash to shareholders. The company has never declared a dividend, though it has repurchased shares. Microsoft (MSFT), which had $36.8 billion in cash and short-term investments at the end of June, is in the midst of a $40 billion repurchase program that runs through 2013. The software maker, based in Redmond, Wash., started paying a dividend in 2003 and since 2008 has paid 13 cents a quarter. Cisco Systems (CSCO), with a $39.1 billion cash pile, in November boosted a share buyback program by $10 billion.

No. 1 Dividend Prospect

In a Bloomberg ranking of 118 companies in the Standard & Poor's 500-stock index that have never declared a dividend, Google ranks as most well-positioned to issue one, based on metrics including sales growth and return on assets and equity. Starbucks (SBUX), which appeared in the ranking earlier this year, paid its first dividend in April. Other companies near the top of the list are Celgene (CELG), First Solar (FSLR), and Gilead Sciences (GILD).

Google, which first sold shares to the public in 2004, has never issued a dividend. In November, Chief Executive Officer Eric Schmidt said the Mountain View (Calif.)-based company planned to use cash to buy back shares once its all-stock purchase of AdMob Inc. was completed, to keep the deal from diluting the stock. The purchase closed in May. "We have made no decisions at all on share buybacks," Chief Financial Officer Patrick Pichette said on a conference call with analysts July 15. "It's a topic that is regularly debated, brought to the board for debate, and we have nothing to announce." Google spokeswoman Jane Penner declined to comment.

The company said in May that it repurchased $97 million in stock related to the acquisition of On2 Technologies Inc., completed in February.

A dividend may be less attractive than a buyback to Google's top executives, who would feel pressure not to reduce it over time, says Keith Goddard, president of Tulsa-based Capital Advisors Inc., which holds Google shares. "Why lock yourself into a quarterly cash dividend that you really can't ever undo?" Google stock, down 21 percent this year, would benefit from the boost of confidence a buyback would signal, says Alan Lancz, president and chief executive officer of Alan B. Lancz & Associates in Toledo, which also owns Google shares. "It would be their way to say that 'our stock is cheap and we still believe in our long-term prospects,' " says Lancz.

Acquisition Risks

Returning cash to investors poses fewer risks than the next obvious use for cash—acquisitions—says Colin Gillis, senior analyst at BGC Partners LP in New York. Google has completed 20 acquisitions in the past year, most of whose terms weren't disclosed, according to Bloomberg data. Its $750 million purchase of mobile advertising startup AdMob took six months to be approved by regulators. Google's $700 million bid for flight-information provider ITA Software Inc., announced July 1, still awaits approval. "They would have a hard time deploying all that cash for acquisitions," says Gillis, who has a hold rating on Google shares.

In the past year, Google has hired bond traders, portfolio managers, and other Wall Street veterans to work on a new trading floor in Mountain View, where they invest the company's cash to bolster returns. Google keeps about 50 percent of its cash holdings overseas, Pichette said on the July 15 call. That might inhibit the company from pursuing a buyback or dividend, says Benchmark's Moran. "If you pay a lower tax rate internationally, and then you bring those profits back to the U.S., you have to pay that difference," says Moran, who recommends that Google buy back about $10 billion of stock. "They could finance it via cash flow generated over the next 12 months, and it would be a sizable buyback within 7 percent of the market cap." Yet Google, with its stock in decline and growth slowing in its main search advertising business, may be trying to avoid giving the perception that its days of high growth are behind it, investor Lancz says. Some investors say that Microsoft's decision to pay a dividend signaled the stock had become "more value-oriented than growth-oriented," Lancz says. Google may be concerned that "if they start buying back stock, that may be the first step toward becoming a Microsoft," he says.

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