Al Root

$70 billion is a lot of money. A company with a market capitalization that big would rank as the 142nd most valuable in the S&P 500.

That meganumber is the amount of money that Alphabet, Google's parent, will spend buying back stock. Alphabet also increased its quarterly payout to 21 cents from 20 cents, lifting its dividend yield to 0.51% from 0.48%. Most of the capital return comes from the buyback.

The repurchase plane is part of the reason shares were up 3.5% in premarket trading at just under $165, while futures on the S&P 500 and Dow Jones Industrial Average had slipped 0.2% and 0.4%, respectively.

Alphabet management might have felt the pressure to do something because, coming into Friday trading, shares had dropped 23% from a 52-week high reached in February. They also might have seen an opportunity. Buying back stock when valuations are relatively low is the smart thing to do, says Research Affiliates founder Rob Arnott.

It's what General Motors did to boost its shares, which now trade for 4.3 times the per-share profit expected for 2025 earnings. Management pivoted to repurchases after struggling to convince investors its car business was relatively stable. When its current $6 billion repurchase authorization is finished, GM will have bought back some $22 billion in stock since the end of 2023, a significant amount for a company with a market cap of $45 billion.

The buyback helped GM's shares, sending them up about 100% from 2023 lows, though President Donald Trump's tariffs have taken some of the starch out of the entire sector.

Alphabet's valuation isn't as stunningly low as GM's, but at 17 times estimated 2025 earnings, according to FactSet, it is lower than the S&P 500's multiple of almost 21 times. The rest of the Magnificent Seven, excluding Tesla, trade for an average of 26 times. The electric-vehicle company trades for 120 times.

Another sign that the stock is cheap is the amount of free cash flow Alphabet generates relative to its market cap. With about $76 billion in free cash flow expected in 2025, the free cash flow yield is about 4%. Not counting Tesla, the rest of the Mag Seven have an average yield of about 3%. Tesla yields about 0.4%.

The average yield for nonfinancial companies in the S&P is less than 4%.

Barron's recently wrote positively about Alphabet stock, believing the threat to the search business from artificial intelligence chatbots was overstated and that a breakup, while not assured, could end up creating value. Shares were just under $167 at the time, a few dollars above their level in premarket trading.

They traded above $207 in February before economic fears sent the Nasdaq Composite down 24% between late February and mid-April.

Barron's still believes things will turn out fine for Alphabet, but investors shouldn't assume the stock is off to the races again.

"Alphabet has seen a significant loss of long-term momentum, such that we expect this year to be either range-bound or a bear cycle," says Fairlead Strategies founder Katie Stockton. "The relief rally should be welcomed as a selling opportunity."

Stockton isn't making a fundamental call on shares. She uses charts and market history to gauge investor sentiment. Investors are still nervous. If shares can get through resistance -- a level investors have taken profits in the past -- at about $180, it would signal that the tide might be turning.

The buyback can help support the stock, but investors should keep an eye on the stock chart. It says Alphabet stock isn't out of the woods just yet.

Write to Al Root at allen.root@dowjones.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

April 25, 2025 09:28 ET (13:28 GMT)

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