On a down day on the market, Microsoft is up today, demonstrating a neat piece of market finance theory. Microsoft is up because they announced they’ll be giving back to shareholders a whole whack of money, 40Billion in share buybacks and an increased dividend rate. Theoretically speaking, share buybacks are functionally equivalent ways to return money to shareholders.
And so the stock is up. But here’s the kicker, MSFT is only paying shareholders their own money. Notionally, the market cap of the firm should stay the same or go down proportionate to the same value of money shifted from one pocket to the other.
Implicitly the market is saying that it believes the same 40B is worth more (Worth 6.75B more to be exact) outside of the hands of Microsoft management than in it. This effect is not actually not uncommon. The market has a tendency to discount the value of large cash balances do to the uncertainty and agency cost/risk of what management might do with it. Empirically studies have shown that firms with higher dividend payout ratios outperform those with lower dividends even if it means they have to go back to the market more often to raise funds for projects (increasing the transparency and accountability of management to market or so the theory goes).
Microsoft could have spent that cash buying up a thousand great startups. They could invest it inventing the next wildly successful ipod, xbox, web OS or they could blow it on the next Vista, Zune or Windows Bob. You just don’t know. That’s the theory anyway.
If Google or Apple gave back 40B to shareholders do you think their stock’s would go up or down?
In the 90’s MSFT minted many millionaires, but this century has got to have been a frustrating ride for employees and shareholders. The stock is still where it was in 1998. In some ways, it’s just hard being a big company. Every year they make piles more money, but only just enough to keep up with the market’s ever-diminishing level of growth expectations (as expressed by an ever diminishing PE multiple). If MSFT was trading at the same multiple as google, today the stock would be over 50.
Microsoft graciously invited me to a big event next month in LA, possibly including sneak peak at Windows 7 and a reinvented Microsoft. I’m sorry I’ll have to miss it, one can hope for great things. It’s funny but I can still remember the days (anyone remember the win95 launch?) when Microsoft was cool. With a new OS, a new browser and many other things on the way, it can only be up from here right?