Is Google Inc’s Cash Hoard Getting Out of Hand?

Traditionally, Google has invested excess cash in acquisitions. But, lately this hasn't been working very well, and the company will have to consider instituting a dividend program, or a substantial share buyback program, to keep shareholders happy.

May 19, 2014 at 12:05PM

Google (NASDAQ:GOOG) (NASDAQ:GOOGL) has innovated many kinds of technologies that help make sense of the Web's vast trove of data. But, the company now faces a very real problem: spending its rapidly expanding cash hoard wisely. The Internet search leader is now sitting on more than $59 billion in cash and short-term investments, and an additional $2 billion in long-term holdings (bonds with a maturity period greater than one year).

That figure pales in comparison to Apple's (NASDAQ:AAPL) $150 billion cash hoard, and Apple has lately been paying dividends and instituted a massive share buy back programs, while Google is ranked No.1 on the list of the biggest companies that do not pay dividends. Google only repurchases its shares occasionally on a case-to-case basis (usually after a big acquisition to avoid excessive share dilution). However, Apple has spent $46 billion on share buybacks and another $18.4 billion on dividend payouts over the last two years.


Google is a victim of its own success. Its core business model involves selling advertising space on its search engine and requires low capital expenditure, but yields fat profit margins.

Having too much cash might seem like an enviable problem for companies starved of the vital commodity. But, a ballooning cash position can quickly get to a point where shareholders begin to get restless and start to give the company's shares a lower value because too much of the stock price is held up by the cash, which yields little real returns.

As long as Google's share price keeps growing nicely, shareholders are unlikely to be concerned about excess cash. But, when the markets get choppy, this can become a source of concern for investors.

More idle cash than Berkshire Hathaway
Warren Buffett, the legendary Berkshire Hathaway chairman, recently conceded that the company's ability to generate cash is quickly becoming a source of worry. Yet, Google's cash is expanding at more than double Berkshire Hathaway's rate. Berkshire holds about $50 billion in cash and short-term investments.


Some analysts contend that Google needs to keep its cash to easily finance acquisitions. Google is lucky in this respect because unlike eBay, which faces a hefty tax charge after repatriating $9 billion of its cash held overseas, Google has $39 billion parked overseas, while the other $20 billion of its cash is held at home and readily available.

Google has become a major M&A, or mergers and acquisitions, force. The company spent $17.6 billion on acquisitions over the last three years. But, that translates to just 50% of the cash it generated during that stretch.

A peek at Google's acquisitions reveals that many of them, with the exception of the likes of YouTube, Motorola, and DoubleClick, are quite tiny, and often unrelated to the Internet giant's core business.

The company also invests in so-called ''moonshot'' projects such as Google Glass and Google X, which involve building revolutionary products from scratch. But ultimately, Google does not have a history of making large acquisitions that require large amounts of cash. It's also sad that many of these projects and acquisitions have not generated fair amounts of shareholder value.

Other options for Google
Google is left with two options on how to use its excess cash: instituting share buybacks, and/or paying dividends.

Several studies have revealed that shares of companies with substantial share buyback programs routinely outperform their brethren with smaller, or no buyback programs. The PowerShares Buyback Achievers ETF tracks companies that have reduced their shares outstanding by 5% or more over the past year.

Shares of companies in the PowerShares Buyback Achievers ETF yielded 24% better returns than the S&P 500 last year, as shown in the chart below.


A share buyback of at least 5% over a one-year period is usually considered satisfactory. Google's market cap currently stands at $358.72 billion. To make that mark, Google would have to repurchase shares worth about $18 billion over the next 12 months. But, Google's readily available cash is ''only'' $20 billion, and such a massive share repurchase would leave only $2 billion in liquid cash. So, that might not be a feasible solution the moment.

Another, more viable option for Google would be to institute a dividend program, borrowing a leaf from Apple, which initiated a dividend payout program two years ago at a 12% payout ratio, then hiked it to 30% the following year. Google is expected to have an EPS near $43.50 in fiscal 2014. A 12% payout ratio would yield a dividend of approximately $5.20. Granted, that looks minuscule for dividend investors since it would translate to a dividend yield of barely 1%. But, analysts predict that Google will grow its cash pile by $20 billion every year through 2016, which would give the company plenty of cash to keep growing dividends.

Foolish takeaway
In the past, Google has often used acquisitions as a means to invest excess cash. But, this has not worked very well so far, and the company will soon have to consider repurchasing shares, instituting a dividend program, or both, to keep investors happy.

Are you ready to profit from this $14.4 trillion revolution?
Let's face it, every investor wants to get in on revolutionary ideas before they hit it big. Like buying PC-maker Dell in the late 1980s, before the consumer computing boom. Or purchasing stock in e-commerce pioneer in the late 1990s, when it was nothing more than an upstart online bookstore. The problem is, most investors don't understand the key to investing in hyper-growth markets. The real trick is to find a small-cap "pure-play" and then watch as it grows in EXPLOSIVE lockstep with its industry. Our expert team of equity analysts has identified one stock that's poised to produce rocket-ship returns with the next $14.4 TRILLION industry. Click here to get the full story in this eye-opening report.


Joseph Gacinga has no position in any stocks mentioned. The Motley Fool recommends Apple and Google (C shares). The Motley Fool owns shares of Apple and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information