this week, similar in size to dividend and repurchase announcements in recent years.Shareholder activists would have been aiming for higher numbers, which would explain why this seemingly good news hasn’t boosted the share price at all.Morgan Stanley reports that Microsoft has $77 billion in cash; $70 billion of which is located offshore, and cannot be repatriated to the US without a tax penalty.
What does this mean to investors?We have a famous company, lacking a future CEO, struggling to eke out every possible percentage point of earnings growth in order to attract investors, because new share purchases help support the share price.The company is barely growing earnings through actual revenue or gross margin increases, so it’s relying on share repurchases to enhance the numbers.(The fewer shares outstanding, the higher the earnings per share for the remaining shares.)
Also,it’s a disturbing trend within American public companies that time and again, we see them allocating cash toward dividends and share buybacks in lieu of building new manufacturing plants or hiring more empoyees.Sure, actual investors are benefitting through dividends and capital gains, but the man on the street is walking toward the unemployment line.
Does that make companies like Microsoft and UPS evil or immoral?No.Their boards of directors have watched waves of onerous and expensive business legislation and taxes come down the pike from the Obama administration – a la Dodd-Frank, the EPA, and Obamacare -- and they’re battening down the hatches and waiting for the storm to blow over.
When corporate leadership sees the winds change, and Congress stops attacking corporate wallets, then boards of directors will feel that they can safely hire employees and expand business without the threat of another tax increase or plant closure.
What should investors do with Microsoft shares?
Earnings are projected to grow about 5-9% per year over the next three years at Microsoft.The PE is 11.9 and the new dividend yield is 3.34%.The low PE and large dividend should add support to the share price around $31, but earnings growth is too slow to give investors a compelling reason to buy the stock when they can buy companies like Verizon Communications (VZ), Dow Chemical (DOW), and Lorillard (LO) with a better combination of earnings growth & dividend yield.
It will take a while for Microsoft to absorb the 32,000 employees from the Nokia purchase, and turn the combination of a slow-growth company (Microsoft) and a barely-profitable company (Nokia) into a thriving enterprise.Current shareholders would likely grow their capital more quickly by trading out of Microsoft in the low $30’s and reinvesting in a growth stock.
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