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The world of business has a new king of money. The title of the company with the largest financial reserves, owned by Apple for a decade, has been pbaded to the parent company of Google, Alphabet, according to figures released in recent days.
This change in direction follows a concerted effort by the iPhone maker to reduce its cash reserves, six years after militant activist Carl Icahn pushed for the first time to pay more. Apple's holdings of cash and marketable securities, net of debt, dropped to $ 102 billion, following a peak of $ 163 billion at the end of 2017.
Alphabet's financial reserves have moved in the opposite direction. At $ 117 billion, its cash flow increased by nearly $ 20 billion over the same period.
The rise of Google's parent company to the top of corporate liquidity ranks its wealth and power at the forefront, at a politically sensitive point in time. After being seen inflicting antitrust fines of 8.2 billion euros to the EU over the past two years, Washington is now undergoing scrutiny.
The choice of the company to keep its money and spend it to try to break into new markets, rather than using it to reward shareholders with redemptions or dividends, as Apple did, is also upsetting some investors.
"In general, their attempts to reinvent themselves with their new initiatives have not come to fruition," said Walter Price, Portfolio Manager at Allianz Global Investors. "I wish they bring in more money to the shareholders and waste less."
Too much cash?
The accumulation of liquidity has arrived despite a significant increase in capital expenditures. Last year, with $ 25 billion, up 50% over 2017, a lot of the money was invested in real estate, while Google added to its offices in cities such as New York and built data centers to support its growing cloud computing business.
Ruth Porat, Chief Financial Officer, has made efforts to minimize real estate investments, noting that they are unique and that in a typical quarter, 70% of capital expenditures are spent on servers and other new equipment.
The infrastructure of artificial intelligence support set up by Google "requires a ton of computing power," said Youssef Squali, an badyst at SunTrust Robinson Humphrey. But he added that, like some other big tech companies, machine-learning expenses had increased, directly resulting in higher incomes. This had left Wall Street generally comfortable with rising expenses.
It is in areas other than Google that the complaints persist. Alphabet derives almost all of its money from its search-related advertising business, complemented by the strong growth of the YouTube online video service.
On the other hand, Google's other activities, such as cloud computing, smartphones and home automation, consume money. Alphabet has also lost $ 15 billion over the past six years since the start of disclosure of information in companies next to Google – something that she describes as her "other bets," ranging from the Waymo driverless auto unit at the Verily Healthcare division.
Google has done enough to "make the cut" in cloud computing, where it is chasing after market leaders, Amazon Web Services and Microsoft, said Price. But he added that it had had little impact on other markets.
Increase of redemptions
Until last week, Alphabet has also distinguished itself among the leading companies in the technology sector for not adopting a more aggressive position on the return of money to shareholders following the adoption of the US tax reform. end of 2017. The new law applied an immediate tax rate – albeit a reduced one. to cash reserves of US companies abroad, eliminating the incentive to stay on the money rather than start paying it.
Apple has responded to the change by spending $ 122 billion on stock repurchase and dividends over the last 18 months. Other companies to dig include Cisco Systems, which has reduced its cash reserve from $ 35 billion at the time of the new tax law to only $ 11 billion.
In contrast, Alphabet's share buybacks were derisory. In almost four years since the start of the buyout of its own shares, it has spent an average of only $ 1.7 billion per quarter.
During this period, he distributed more new shares in the form of employee benefits than he bought back as part of his buyback program. As a result, payments have done nothing to increase earnings per share, which is why investors generally want redemptions.
Things may be about to change. Alphabet said last week that its board had added $ 25 billion to its share buyback program, bringing the total new redemption authorizations to $ 37.5 billion since the beginning of this year.
Porat said the increase reflected no change in Alphabet's financial priorities and that its two main objectives were unchanged: investing in the long-term growth of its existing business and supporting acquisitions. However, this decision contributed to a strong rebound in the stock price the same day the company also announced a rebound in the growth of its turnover, dispelling worries about the sharp slowdown in its advertising activities. .
The mountain of money
Even the high redemption rate may not be able to limit the growth of Alphabet's cash. According to estimates by George Salmon, an badyst at Hargreaves Lansdown, his free cash flow is expected to reach $ 30 billion this year and nearly $ 40 billion next year. The new redemption intentions "do not represent a radical change" large enough to actually reduce the company's total reserves, he said.
Many investors are now banking on a steady increase in Alphabet's share buybacks as its search engine advertising activity continues – just as Apple has reacted to the end of iPhone volume growth with an effort more concerted distribution of his money.
According to some investors, an opportunity to use income-generating acquisitions seems less likely given the regulatory environment. "The US government will address the issue of mergers and acquisitions by making it more difficult to reach agreements," said Jim Tierney, chief investment officer at AllianceBernstein. Along with the growing maturation of its core business, this should make the $ 25 billion buyout announced last week "the tip of the iceberg," he said.
Facebook, with less than half of the cash reserves, has also decided to distribute a larger portion of its cash surpluses, far exceeding Google 's spending last year in share buybacks.
"They're going to become cash wickets with no other source of funding than buying," said Tierney.
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