The Week

Google: Certain investments 'not for the faint-hearted'

The Globe and Mail

Mark Carney, Governor of the Bank of Canada. (Deborah Baic/The Globe and Mail)

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Google's dividend The founders of Google Inc. rewarded shareholders this week with what they called an "effective" stock split, but they also rewarded themselves in the unique approach they took.

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It's also notable that Larry Page and Sergey Brin were up front about the controversial move.

As they reported gains in profit and revenue for the first quarter Thursday, Mr. Page and Mr. Brin also announced that the Internet search giant is creating a second class of stock, with no voting rights, via a dividend.

Some corporate governance observers don't favour such a move, though the two founders said it's consistent with the approach they took when the company went public, and it's a better long-term approach. They maintain control of the company through multiple voting shares.

"We recognize that some people, particularly those who opposed this structure at the start, won’t support this change - and we understand that other companies have been very successful with more traditional governance models," they said in a letter to shareholders.

"But after careful consideration with our board of directors, we have decided that maintaining this founder-led approach is in the best interests of Google, our shareholders and our users."

"In our experience, success is more likely if you concentrate on the long term," they added in the letter as they also reported a surge in first-quarter profit and revenue.

"Technology products often require significant investment over many years to fulfill their potential. For example, it took over three years just to ship our first Android handset, and then another three years on top of that before the operating system truly reached critical mass. These kinds of investments are not for the faint-hearted. We have protected Google from outside pressures and the temptation to sacrifice future opportunities to meet short-term demands."

Google also reported that revenue climbed to $10.7-billion (U.S.), up 24 per cent. Excluding commissions to partners, revenue rose to $8.14-billion (U.S.) in the quarter, up from $6.54-billion. Profit surged to $2.89-billion or $8.75 a share, from $1.8-billion or $5.51.

Betting on the bank The Bank of Canada won't hike interest rates when it meets next week, but it is expected to change its tone amid a generally brighter economic outlook.

Governor Mark Carney and his colleagues are expected to hold their benchmark rate steady at 1 per cent on Tuesday, which will be followed by the release of their Monetary Policy Report a day later.

The central bank will probably cite a better backdrop and less concern over the euro debt crisis, though warn that risks remain. Indeed, the troubles in Spain and Italy flared up again this week, setting the stage for whatever Mr. Carney has to say.

"The Bank of Canada will sound slightly more hawkish in projecting a narrower output gap with an earlier date to close it, and a bit less fear of a financial panic originating in Europe," said chief economist Avery Shenfeld of CIBC World Markets.

"It’s too early to either hike rates or sound a clear warning of an upcoming move. But the less dovish statement and policy report could have markets pricing-in a bit higher odds of hikes late this year or in early 2013, even though our view is that when we get there, the economy won’t be strong enough to justify them."

Mr. Carney and his colleagues probably aren't about to "abandon deep-seated concerns over the risks inherent in a turbulent macro backdrop" despite the domestic economy's stronger footing, added fixed income strategist Ian Pollick of RBC Dominion Securities.

"The market will read the statement and MPR as hawkish, though we would think it better characterized as less dovish," he said. "Nonetheless, this will likely facilitate upside pressure for rates."

China fears linger Concern over China's economy persists, though all the signs point to a soft landing.

Data released this week showed lending surging, though economic growth slowing in the first quarter. You've got to remember, though, that slower growth for China means slipping to 8.1 per cent from 8.9 per cent in the final quarter of last year.

The first-quarter showing marked the slowest in almost three years, a concern given China's importance to the global recovery, and that renewed investor fears. Some economists believe the angst is overdone, and that the People's Bank of China will move soon to ease policy.

"Acknowledging the fact that the 8.1-per-cent year-over-year rise in real GDP was the slowest increase in three years, does such a pace scream 'hard landing?'" said senior economist Jennifer Lee of BMO Nesbitt Burns.

"Hardly. Remember: the official growth target was lowered to 7.5 per cent for the year, so it’s gliding toward that target. And much of that slowdown was on the trade front (likely Europe-related), as net exports subtracted 0.8 percentage points from growth. But the March economic data have been more positive, suggesting that the economy picked up some tailwind at quarter-end."

As Ms. Lee noted, industrial production climbed 11.6 per cent and retail slaes just shy of 15 per cent in the first quarter. And new lending in March topped 1-trillion yuan.

Mark Williams and Qinwei Wang of Capital Economics agree with Ms. Lee, saying "there were some clues in the latest data that the economy is bottoming out and, with the State Council giving a strong signal today that credit policy will be loosened further, we think it likely that growth will pick up in Q2."

Required reading this week After a year of rapid political changes, Myanmar is opening its doors to foreign investors, Mark MacKinnon writes from Rangoon, but even if some sanctions are lifted, it will still be a challenging place to do business.

The unemployed need jobs, and companies need more workers, but skill shortages, geography and lack of training are all contributing to a disconnect, Tavia Grant and Richard Blackwell report.

Retired Surpeme Court of Canada justice Ian Binnie talks about the "corporatization" of Canada's big law firms, and other things on his mind, in an interview with Jacquie McNish.

Natural gas companies face credit woes, plunging stocks and poor revenue as the commodity hits a 10-year low amid a glut and warm weather, Carrie Tait writes.

Bauer Performance Sports Ltd. has drawn a minor penalty from its successful rush to become the world’s No. 1 maker of hockey sticks. Sean Silcoff examines why.

What to watch for next week Besides the Bank of Canada, economists will be watching next week for reports on home sales and consumer prices.

Amid a generally cooling market, the Canadian Real Estate Association is expected to report Monday that both increases in resales and prices tapered off in March, down 0.3 per cent and 0.1 per cent year over year. If that's the case, growth in each would be down sharply from February's showings.

"However, the subdued national numbers mask a massive regional discrepancy," said senior economist Michael Gregory of BMO Nesbitt Burns.

"Activity is receding sharply in the past-booming Vancouver and Fraser Valley segments; combined March unit sales are already reported down more than 27% year over year with average prices down more than 5," he said in a report.

"Excluding these two areas (ranked No. 2 and No. 5 most active in Canada), existing home sales likely increased 5.9 per cent year over year in March, with average prices up 7.1 per cent, led by Toronto’s (No. 1) near 8 per cent and 10 per cent gains (respectively). Interestingly, during the late-1980s/early-1990s, Toronto’s housing market crash was offset by a booming Vancouver to keep the national metrics moving sideways. Could these markets now be trading places? Ultimately, this might make national policymakers a little more tolerant of Toronto’s current housing boom."

On Friday, economists expect Statistics Canada to report that consumer prices climbed 0.5 per cent in March, bringing the annual inflation rate to 2.1 per cent.

"While energy prices could see another 0.4 per cent rise from February on the back of gasoline, food inflation has been trending down since late last year, and falling meat prices could contribute to further improvement," Mr. Buchanan said.

"Offsetting better news on that front, firmer domestic auto sales could see reduced vehicle discounting."

In the markets, Canadian Pacific Railway Co. has already taken most of the surprise out of its first-quarter earnings report, which is scheduled for Friday.

Under the gun from activist shareholder Pershing Square Capital Management, and in the midst of a proxy fight, CP has already said it expects to post earnings per share, diluted, of 80 cents to 83 cents, better by about 300 per cent from a year earlier, when it suffered weather troubles.

"CP’s shares have re-rated nicely since Pershing Square started accumulating CP’s shares and launched an activism campaign," said analyst Hilda Maraachlian of UBS Securities Canada, who expects earnings per share of 81 cents.

"We believe the potential for further multiple expansion is limited from these levels and any potential upside from [operating ratio]improvement in the near term is already priced in."

Companies & investments Mentioned In This Article (2)

Company Price Change Volume
Canadian Pacific Railway
CP-T
163.21 0.616 % 186,676
Google
GOOG-Q
536.10 -3.673 % 6,795,393