Why Alphabet's Repurchase Program May Be Just Getting Started

By Motley Fool Staff Markets Fool.com

High-growth tech companies don't usually come to mind when share buyback programs are discussed, but when done right, they can be just as lucrative for tech companies as for established dividend players.

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In this segment fromIndustry Focus: Tech, Motley Fool analyst Dylan Lewis and contributorDaniel Sparks look into Alphabet's (NASDAQ: GOOGL) (NASDAQ: GOOG) $7 billion buyback program, why it makes sense for the company, and why this is probably just the first of many.

A full transcript follows the video.

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This podcast was recorded on Dec. 2, 2016.

Dylan Lewis: Looking forward out beyond just 2017, we see what Alphabet has done with a second program, this time a $7 billion program, on top of the $5.1 billion they already exhausted. I think that's a signal that this is going to be a mainstay now that they have established they want to be a little more Wall Street friendly under CFO, Ruth Porat. I wouldn't be shocked at all to see, once Facebook runs through this initial share buyback authorization, that they continue to have this be an ongoing program with subsequent authorizations, in order to continue to offset those rising share-based compensation numbers.

Daniel Sparks: Right. The $7 billion program does make sense. I think investors should be happy about this. You look, too, at Alphabet's free cash flow, their cash on hand. Their trailing-12-month free cash flow was $23 billion, so they definitely have this kind of money to be spending $7 billion on repurchasing shares. So that makes sense. And then the trajectory of free cash flow is huge. In 2015, free cash flow was $16 billion. It's definitely growing fast. A lot of excess cash here to be repurchasing shares. I would say that I would like them to be a little bit more opportunistic, with the kind of cash flow they have, and hopefully spend the money a little faster this time around. But, like you said, this is a continuation, the $7 billion. The one before was $5.1 billion, so maybe we're starting to see the beginning of what could turn into a more aggressive buyback. But, maybe it's too late then for it to be opportunistic. We'll see.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Daniel Sparks owns shares of Facebook. Dylan Lewis owns shares of Alphabet (A shares). The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Facebook. 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.