Math: Fewer Shares, Pricier Shares
Microsoft has been on a roll.
Late last month, it did something it hadn’t pulled off since Bill
Gates was chief: Its share price reached a new high.
achievement was so long in coming — the last peak was on Dec. 27, 1999
— that it seemed to elicit more snide comments than outright
celebration: “If you’ve stuck with it over the last 16 years,
congratulations on finally getting back into the black!” the Bespoke
Investment Group wrote to its clients.
Satya Nadella, chief executive of Microsoft, which
generates a lot of cash, though it’s no longer a fast-growth company. In
10 years, it has used $123 billion of that to buy its own shares.
Credit Divyakant Solanki/European Pressphoto Agency
and Office, Microsoft’s two big cash cows, have
churned out profits and its new chief
executive, Satya Nadella, has been trying for a turnaround, there are good
reasons to be skeptical of Microsoft’s record.
First, the new
highs aren’t real, by which I mean the $53.60 peak of 1999 would amount to
$76.56 today in inflation-adjusted numbers, and while the stock rose again last
week, it is still trading below $55. In real dollars, Microsoft still has a long
way to go. Second, in achieving its current share price, Microsoft has engaged
in stock buybacks, a form of financial engineering that is both popular and
nothing intrinsically wrong with buybacks,
said Aswath Damodaran, a corporate finance professor at New York University.
They are a powerful weapon, he said, neither good nor bad in themselves. “It all
depends on the company and the timing and on how you use them,” he said.
used buybacks well, in his view, though its need to do so says some
uncomfortable things about the company and our current situation. “I applaud
Microsoft for being realistic,” he said. Microsoft still generates a lot of
cash, but it no longer is a hyperkinetic engine of growth, he added.
live in dog years,” Mr. Damodaran said, “and being 10 years old in tech is often
like being 70 years old for a company like Procter & Gamble.” Microsoft began
showing its age in the late ’90s and has gradually accumulated self-knowledge,
he said. “It’s like a 61-year-old who has become comfortable with himself and
has decided to act appropriately.”
said, Microsoft has used substantial sums of money to change its stock market
profile by shrinking itself. In December 1999, its market capitalization was
more than $600 billion. Today, its market cap is only about $430 billion.
For years now,
Microsoft has been systematically buying back its shares, reducing its total
share count. Howard Silverblatt, senior index analyst at S&P Dow Jones Indices,
tabulated the numbers. Over the 10 years through June, Microsoft spent $123.6
billion buying back shares. That is more than any other company (though Apple,
with $90.2 billion in buybacks, has been catching up). Going back to 2004,
Microsoft has bought $136 billion in shares through June, Mr. Silverblatt’s
figures show, reducing net share count by 26 percent.
For any company — and many of them are doing it — reducing share count
through buybacks has great advantages. If earnings stay the same but
share count falls, then earnings per share rise, as if by magic. That
will, not incidentally, help executives whose compensation is often
tied to earnings-per-share targets, which are suddenly easier to
Securities and Exchange Commission clarified buyback rules in 1982, dividends
were far more common as a means of funneling money to shareholders, which
buybacks do, too. But nowadays buybacks are more popular, partly because they
are a more flexible instrument for chief financial officers, Mr. Damodaran said.
“Investors often expect dividends to be permanent, like coupon payments for
bonds — even though, legally, dividends can be canceled — and they’re shocked
when that happens,” he said. Paring down buybacks is more easily accepted by the
markets, he said.
buybacks may help drive up share prices, though it’s difficult to prove, said
Edward Yardeni, an independent economist and strategist who has written
frequently about buybacks. The buyback effect on earnings per share is just
simple math, he said, and it “is utterly meaningless if you understand it,
because the company’s earnings don’t change, yet it seems to have an effect on
the markets.” Furthermore, by buying shares at opportune times, companies may be
able to bid their own share prices higher. That’s why
Senator Elizabeth Warren, Democrat of
Massachusetts, called buybacks “stock manipulation” and has asked the S.E.C. to
possible, as Ms. Warren has charged, that companies could better use their cash
by pouring it into factories and research that would create jobs. But it’s also
true that executives frequently
fritter away big hunks of cash on fruitless
endeavors and foolish acquisitions.
done just that repeatedly, Mr. Damodaran said. In July alone, it
wrote down the value of its disastrous
acquisition of Nokia, the Finnish phone maker, by $7.5 billion. “Microsoft
hasn’t used cash well that way,” he said. “Corporate executives often don’t.
It’s often much better to simply return cash to shareholders.”
buyouts and dividends, Microsoft returned to shareholders a net yield of 7.22
percent of the value of their shares in the 12 months through September, he
calculated. As a strategy, the maneuver works in several ways. Because Microsoft
is one of only three nonfinancial American companies with a triple-A rating
(along with Johnson & Johnson and Exxon Mobil), it gets extremely favorable
rates in the bond market, as it did last month, issuing $13 billion in debt. It
can use that cheap money for buybacks and dividends, deducting interest payments
from its domestic income while keeping all but about $3.3 billion of its
$99 billion of cash and liquid investments
overseas, Moody’s estimated. All of that lowers Microsoft’s American taxes, Mr.
approach is both disturbing and admirable, he said. “As citizens, we are getting
the worst of both worlds, but under current tax laws and with interest rates as
low as they are, the buybacks are very smart,” Mr. Damodaran said. Under current
circumstances, many intelligent C.F.O.s will be strongly motivated to use them.
A version of this article appears in print on November 8, 2015, on
page BU6 of the New York edition with the headline: Microsoft’s
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