Last week, search juggernaut Google (GOOG 1.43%) (GOOGL 1.42%) delighted shareholders with an all-around solid earnings release, sending shares soaring in the process. Revenue was up 11%, earnings per share came in higher than expected, and YouTube viewership is through the roof. It's no surprise Google shares hit an all-time high following the report.
With Google's business performing better than ever, investors return to a familiar question: Will Google start returning capital to shareholders in 2015?
Never say never
New CFO Ruth Porat (she started in May) dropped a couple of comments that suggest a capital return program could be on the horizon. Perhaps more importantly, she did this of her own volition. One analyst pointed out that Google's current debt load is well below what it could handle and he wanted to know if Google would consider turning to debt if it needed to theoretically finance a large acquisition. After discussing how balance sheet efficiency and maximizing shareholder value are her primary concerns, she added this:
But if you step back as I've looked at it and the key issue is what do we need for working capital? What do we need for CapEx? What do we need for M&A? What do we need potentially for capital return?
She elaborated further later on in the call:
As you noted, it is early days but the way I view any assessment of a return on capital for my prior answer regarding balance sheet efficiency is really in the context of maximizing stakeholder value over the medium to long-term. And with return of capital it gets into the context of, how do you prioritize and allocate cash after an appropriate reserve for working capital among the CapEx, M&A and then potentially that capital return.
In the end, Porat concluded that it's "premature" to think too seriously about a capital return program.
Reading between the lines
The good news is that Google's working capital has been steadily rising for years and is quite healthy right about now.
GOOG Working Capital (Quarterly) data by YCharts
But when it comes to capital return programs, working capital isn't the only metric to consider. Since companies can only use domestic cash to fund these programs, investors have to be cognizant of how much of that cash is held abroad. In Google's case, the company has about $70 billion in total cash, but $40 billion of that total is overseas, leaving around $30 billion domestically.
But this is precisely where debt could come into play. Google currently has a very modest debt load of just $5.2 billion, including both short-term and long-term debt. It generated nearly $7 billion in operating cash flow last quarter, and $4.5 billion in free cash flow. Issuing debt to return capital and repurchase shares would also lower Google's weighted average cost of capital. Of course, this is precisely the route that Apple (AAPL 0.51%) took.
All it takes is a changing of the guard
There's another possible parallel here to Apple. The Mac maker had long resisted implementing a capital return program and the hurdle had a name: Steve Jobs. Jobs had always been averse to share repurchase programs and that was unlikely to change. It wasn't until Tim Cook became CEO that Apple would promptly start giving back to shareholders. Having a Wall Street pedigree, Porat may be the catalyst for Google to follow suit, much like Cook was for Apple.
And that would be a good thing for shareholders.
