A Brief History of Microsoft's Returns
Despite constant attempts by analysts and the media to complicate the basics of investing, there are really only three ways a stock can create value for its shareholders:
- Earnings growth.
- Changes in valuation multiples.
In this series, we drill down on one company's returns to see how each of those three has played a role over the past decade. Step on up, Microsoft (NAS: MSFT) .
Over the past 10 years, Microsoft has returned a total of 11% to shareholders. How'd it get there?
Dividends have accounted for essentially all of the return. Without dividends, Microsoft produced a 13% loss over the past decade.
Earnings growth over this period has actually been substantial. Since 2001, Microsoft's earnings per share have grown at an average rate of 15% a year -- well above the market average, and a performance that would normally reward shareholders with handsome returns. Among large-cap companies, Microsoft's earnings performance over the past decade ranks near the top.
The change in earnings multiples over the past decade is what really sticks out:
Source: Capital IQ, a division of Standard & Poor's.
This chart explains why Microsoft's returns have been subpar amid otherwise extensive earnings growth; its earnings multiple has simply collapsed. Part of this is due to how high it was 10 years ago, coming off the dot-com bubble -- the same is true for companies such as Intel (NAS: INTC) and Oracle (NAS: ORCL) . Even so, Microsoft's earnings multiple has, by most accounts, fallen to an unreasonably low level. At nine times earnings, the company is essentially priced for no future growth -- a very unlikely scenario.
Why is this stuff worth paying attention to? It's important to know not only how much a stock has returned, but where those returns came from. Sometimes earnings grow, but the market isn't willing to pay as much for those earnings. Sometimes earnings fall, but the market bids shares higher anyway. Sometimes both earnings and earnings multiples stay flat, but a company generates returns through dividends. Sometimes everything works together, and returns surge. Sometimes nothing works and they crash. All tell a different story about the state of a company. Not knowing why something happened can be just as dangerous as not knowing that something happened at all.
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At the time this article was published Fool contributor Morgan Housel owns shares of Microsoft. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of Oracle and Microsoft. The Fool owns shares of and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of Intel and Microsoft. Motley Fool newsletter services have recommended creating a diagonal call position in Intel. Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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