Alphabet Inc (NASDAQ:GOOGL) has long been among my favorite stocks. This despite the fact that I have always been concerned about its corporate governance. In a way, it is the exception that proves my rule stating that the better the corporate governance, the better the company (and thus the stock prospects, in the long run). I view corporate governance as a subset of the greater concept of company culture.
While I have historically not liked GOOGL’s corporate governance, this has been but a black mark in the company’s culture, which otherwise seems outstanding. Thus, I have not wanted to over-penalize the stock for relatively poor corporate governance given that I like many other aspects of GOOGL’s culture quite a lot.
So what has my issue been with Alphabet’s corporate governance?
Immediately below is what I wrote in April:
This is a somewhat different situation, and more of a corporate governance issue. Here, my clear long (as well as intermediate and short) term preference is for GOOGL over GOOG. GOOGL is one of my top picks for 2015. In the interest of full disclosure, while I have long liked the Google story, at the time of the ‘stock dividend’ in which similar to a stock split shareholders got one GOOG and one GOOGL share for each share of Google they owned, I sold all my GOOG shares in order to subsequently replace them only with GOOGL.
Those of you more familiar with my work know that corporate governance and culture are very important to me. Google is one of the exceptions that proves the rule, and I very much like the story as a whole despite the fact that I hate its corporate governance. The GOOG/GOOGL split was a particularly reproachable action. Still, while I do not approve of their corporate governance practices, I understand the controlling shareholders’ motivation and reasoning. Moreover, I trust their vision and capabilities enough to be willing to sacrifice voting rights to them. Still the GOOG/GOOGL split went a bit too far, and I wanted no part of the GOOG class of stock (preferring GOOGL instead).
I have such a high opinion of Alphabet’s management, vision and the overall corporate culture that the stock remains one of my long-term favorites. The company has continued to evolve and bolster its management team. Ruth Porat, the relatively new CFO, was expected to improve transparency and sharpen the company’s focus on capital discipline (and her former Wall Street colleagues hoped for a more efficient balance sheet to come from her involvement as well). She has certainly helped to deliver. The change to the new Alphabet structure has come under her watch. She has left her mark on everything down to what CEO Larry Page referred to as a play on words, highlighting the new name as a bet on alpha. Long in investors’ lingo, GOOGL will probably for many years to come remain an important source of alpha.
But finally to what most intrigued me about Thursday’s announcement accompanying the strong quarterly earnings release – the company’s stock buyback. Cleverly calculated based on the square root of 26 (the number of letters in the English alphabet), the company will repurchase a rounded $5.1 billion worth of stock. But the shares Alphabet will repurchase are the no-vote, class C GOOG stock! Rightly, in my opinion, that class of stock had developed a meaningful trading discount versus GOOGL. In after-hours trading, GOOG already began to outperform GOOGL, starting to cut the no-vote discount. Should we take this as a sign that Ruth Porat does not approve of that poor corporate governance practice?
If all future stock buybacks are focused on the stock without voting rights, that share class could eventually be eliminated. In the meantime, however, the discount at which GOOG trades to GOOGL will tend to get increasingly smaller. As far as the magnitude of the buyback, while sizable, it indicates that Alphabet does not intend to neglect investing in both organic growth and M&A, focusing very much on the long run. In the end, perversely, the company’s poor corporate governance practices have been largely due to the fact that the founders and management have apparently believed that the short-term focus of Wall Street means that sticking to best governance practices may be at odds with focusing on the long term. Hopefully, the company has proved itself sufficiently to Wall Street that it can lead in doing both.
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