No Cash, Not a Problem For Google

By Eric Novinson - October 11, 2012 | Tickers: AMZN, AAPL, GOOG, MSFT | 0 Comments

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Though its online Adwords network brings in the cash for Google (NASDAQ: GOOG), the search giant now has a plan that could wring even more money out of its text ad sales. A 24/7 Wall Street article at AOL DailyFinance explains that British marketers can finance Adwords spending with Google credit cards at 11.9% right now, while marketers in the United States will have to wait a few weeks for a better 8.9% rate. Offering credit cards like these makes sense for Google for five reasons.

First, Amazon.com's (NASDAQ: AMZN) experience shows that direct loans can work out well for a major tech company. In a Wall Street Journal article, Sarah E. Needleman and Greg Bensinger report that Amazon offered loans to merchants that banks rejected through its Amazon Lending program. Amazon seems satisfied with its program, since it's still around this year, and customers have already provided some happy testimonials to reporters about how well these loans worked in 2011. If Amazon experienced high default rates or low rates of return, the company might have ended Amazon Lending.

Second, Google could pick up some goodwill from merchants with this move. Merchants who had weak sales earlier in the year might apply for Google credit cards to show ads to holiday shoppers. If banks won't lend to small merchants, Google can come in to save the day, even though lending to these merchants does add default risks.  A merchant who rings up higher holiday sales in 2012 thanks to a Google credit card might be more willing to spend on Adwords in 2013.

Third, Google might have figured that issuing credit cards itself offered more interest income than buying asset-backed securities from banks. In an Aug 7, 2012 article, Wall Street Journal reporter Katy Burne reported that Google bought auto-backed securities and credit card asset backed securities, and a Barclays car loan backed security index showed 2.34% average returns. Al Yoon, at 4-Traders, states that credit card-backed securities provide around 0.71% returns. A credit card with 8.9% interest offers much more potential income for Google than these asset-backed securities, although asset-backed securities do provide some protection from default risks.

Fourth, Google can use its Adwords customer records to assess borrowers' repayment prospects. Google knows how many visitors click on web ads and search results and visit a merchant's site. This click data could help Google estimate the merchant's expected sales figures and calculate an appropriate credit line. Amazon can also use its own data as an alternative to traditional credit reports, since Amazon knows what products a merchant sold on its own platform. Google and Amazon aren't taking on as much risk as a smaller retailer would incur by offering loans itself.

Fifth, this move helps justify Google's decision not to pay cash dividends. With a $41.72 billion bank account, the company likely won't run into cash flow problems -- but Google needs to achieve a good return on its cash. An 0.71% return from asset-backed credit card securities doesn't even measure up to the dividends Apple (NASDAQ: AAPL) and Microsoft (NASDAQ: MSFT) pay out. 

Apple has a 1.7% yield at $636 a share right now, and Microsoft has a 3.1% yield at $29 a share. Google shares currently trade at $744. If Google matched Apple's yield, it would pay out around $13 a share, and if Google marched Microsoft's yield, its dividend would be about $23 a share.

Reuters reported that Google did issue a dividend of special stock without voting rights earlier this year, but investors who want cash dividends might still pick Microsoft or Apple. Adwords credit cards put Google's cash reserves to work, weakening the argument in favor of dividends.  

Credit cards have both income and revenue implications for Google. Google could make sales it wouldn't have made otherwise and strengthen its customer loyalty, which could increase future revenue. Credit cards offer much higher returns than some of the other places Google has parked its cash, which could increase future earnings. Adwords credit cards make Google look like a better investment.

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