Microsoft's Ten Year Disconnect Between Corporate Profit and Shareholder Returns

This story eludes easy explanation:

Over the past ten years, Microsoft has posted revenue over $360 billion and profits over $107 billion. But, if you purchased Microsoft stock ten years ago on February 26, 1999 at the price of $31.18 per share, at its current price of $16.96 (and adjusting for $5.09 in dividends), your investment would have lost 29.3% or 2.9% annually vs. Microsoft's $10.7 billion in average annualized profit.

We often expect long term investors to do well over time, but in this case - despite some of the greatest corporate profits ever, Microsoft's long term shareholder returns have been negative. This may be one of the most astounding examples of a disconnect between long term corporate profit and shareholder returns.

It's not just the recent market collapse either. Even if you sold your stock one year ago at the price of $27.78 per share (and adjusting for $5.09 in dividends), you would have earned 5.4% on your investment over ten years or just .54% per year.

As of June 2008, Microsoft had $23.7 billion in cash on hand and approximately 8.89 billion shares outstanding. Assuming a cash distribution of these funds of $2.66 per share - the returns are only slightly improved.

I am not alleging any financial wrongdoing by Microsoft, nor excessive corporate greed. My sense is that traditionally, Microsoft has paid its executives in line or just below corporate averages.

Did the market over-value Microsoft's future growth ten years ago - and what might this mean to Google in the coming years?

I am struck by how little the market values steady profit - and the general disconnect in market investing between owning a company and the regular dividends it delivers.

This story may also be an indicator of hubris at Microsoft. Perhaps in 1999 and the years following, management expected to deliver another winner of the magnitude of Windows or Office - this didn't happen (perhaps Google delivered it). And, as this become steadily clear to the public, Microsoft management failed to raise its dividend fast enough to keep up with the declining prospects of its future growth. Or, perhaps its next big hit from all of its research investments is on the horizon (right).

I'm curious to hear people's thoughts on this one. This clearly has been a bad ten years for Microsoft investors.

By the way, if you were unlucky enough to buy Microsoft at its all time high in December 1999 at $58.38, you would currently be down 62.2% on your near ten year investment.

My data and calculations are shown below - TypePad isn't very friendly to pasting excel tables, so I placed them as gifs (sorry).

If this post interested you, you might want to check out my articles from 2004-2005 entitled, Microsoft's Sacred Cash Cow, Citizen Microsoft or Investing for Change.

Comments

[Troy]

The explanation seems simple. ALL internet and internet-related companies were overvalued in 1999. Greenspan called it "irrational exuberance", and those stocks fell back to their true value during 2000 and 2001. It's a lot like what is happening with houses between 2007 and 2009.

The internet bubble caused losses all across the board, not just MSFT stock. A more-valid comparison would be during 1995 (pre-bubble) and 2005. How would an investor have made-out during that ten year span? Probably quite well.