"Doomsayers have predicted wreckage for the company for years, and we're
seeing hints of mortality as Gates is gone and Redmond goes through its
first major layoffs and new cutbacks. But it turns out the picture of
what's going on may be even worse for investors."
Perhaps part of what's wrong with the U.S. stock market and corporatism is that a company can post $360 billion and profits over $107 billion in ten years while its shareholders lose 29% of their investment - and no one blinks an eye.
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).
In 2005, I wrote an article about socially responsible investing for the Seattle Weekly entitled Investing for Change. SRI is a topic I hope to discuss frequently in this blog. As 2008 turned into a bloodbath for most stock investors (the Dow Jones dropped 4,024 points from 12,800 to 8,776) as well as in my own portfolio, my investment in fair trade coop Equal Exchange actually continued to post a steady profit.
Once again, Equal Exchange's board announced a profitable year ($34 million in sales, up from $29 million in 2007) and awarded another 5% dividend to investors. Equal Exchange has now posted 23 years of steady growth.
A couple quotes from EqEx's investor update stand out to me as differentiating them from traditional stocks and mutual funds:
"Equal Exchange is a worker co-op with two decades of experience, and because of that is an intrinsically prudent organization. The 90 or so worker owners have invested over $700,000 of our own money in Equal Exchange. If we make a loss, that money is at risk, which is partly why we've only made a loss once in the last 20 years. Being a worker co-op means we manage expenses personally and we take the mission personally. This is not just a business, it is our livelihood, and as an economic democracy we have the means to set the co-op's direction and work together to make it succeed."
I increased my investment in Equal Exchange after traveling to Peru in 2006 with the company, spending time getting to know some of the coffee farmers and cooperative workers there. You can see some photos from the trip here.