Google: Now More Than Ever

What is a "defensive stock," anyway? At the investor learning center for BMO Financial, formerly known as Canada's Bank of Montreal, it's defined as "a company with continuous dividend payments, which has demonstrated relatively stable earnings despite poor economic conditions." In short, think Johnson & Johnson (NYSE: JNJ  ) , Altria (NYSE: MO  ) , and General Electric (NYSE: GE  ) .

Makes sense to me, but with a caveat: Not all large, dividend-paying firms can be fairly classified as defensive. Witness the financial-services sector. Wall Street's best are increasingly failing at the high-wire capital balancing act. Bear Stearns (NYSE: BSC  ) -- a dividend payer -- is but the latest casualty.

The awful carnage has me hearkening back to what Foolish friend Hewitt Heiserman Jr. first told me in 2004: "I think one of the great lessons of the late '90s is that investors forgot about ... the balance sheet."

When times are bad, according to Heiserman, the firms with unassailable capital positions are truly "defensive." By that measure, few firms are more defensive than Google (Nasdaq: GOOG  ) .

Look at that balance sheet! (*whistle*)
Here's a closer look at the search king's fab financial figures:

Balance Sheet Items

2007

2006

2005

2004

Cash and investments

$14,218.6

$11,243.9

$8,034.2

$2,132.3

Debt

$0.0

$0.0

$0.0

$1.9

Stockholder's equity

$22,689.7

$17,039.8

$9,419.0

$2,929.1

Source: Capital IQ, a division of Standard & Poor's. Numbers in millions.

Excess cash flow has long been the driving force behind those improvements. More than $3.3 billion in free cash flow found its way to Big Goo in 2007.

There's a simple reason for that: Google dominates its core market (search) and its ancillary markets (video delivery, etc.). YouTube, for example, served 3.4 billion videos in January for a 34.4% share of the market, according to media tracker comScore.

But that doesn't even tell the whole story. Second place belonged to News Corp.'s (NYSE: NWS  ) Fox Interactive Media with a -- wait for it -- 6.0% share and 584.1 million videos served. Gootube delivers almost six times as much video as its closest competitor.

Search statistics tell a similar story. Google held 56.9% of the search market in January, according to Nielsen. Yahoo! (Nasdaq: YHOO  ) was a distant second at 19%.

Yeah, but it's just search...
To be fair, before we claim that that Google and its sturdy balance sheet fit the mold, we have to address the most important characteristic of a defensive stock as we've come to define it. Has Google "demonstrated relatively stable earnings despite poor economic conditions?"

Yes.

From 2001 (when the last recession began) to 2003 (when the ensuing recovery became clear), Big Goo juiced revenue by more than 300% per year. Yahoo!, by contrast, rose 50% a year over the same period.

An unfair comparison, you say? Hardly. In 2003, Google and Yahoo! were very close in terms of total revenue produced -- $1.62 billion for the incumbent Yahooligans, versus $1.47 billion for their upstart rivals.

Now let's address your other likely question: Search can't possibly compare to consumer durables, right? Right? Perhaps. But advertising hasn't really ever gone out of style. Web ads alone accounted for $21 billion in revenue in 2007.

Google's greedily taking a bigger slice of that pie with each passing year. Maybe that's why the sports pundits love to say that the best defense is a good offense. For Big Goo, it's proven true. And it has the balance sheet to prove it.

For more from Google:


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