Archive for April, 2011

There Must Be a Better Way to Reward Shareholders

April 29th, 2011


There Must Be a Better Way to Reward Shareholders


In Microsoft’s 10-Q filed today, it was revealed that for only the second quarter in at least 10 years, the firm did not buy back net shares (repurchases minus new issuance). In fact, shares outstanding actually increased over the prior quarter.  Is management learning, or does it represent an anomaly? Over the past decade, MSFT has spent over a third of its current market value on its repurchase program, when it initially had a market value of $325 billion, or 46% higher than today.

In the past 20 years, Microsoft repurchased a net $93.5 billion of its outstanding shares, surely to go down as a landmark waste of corporate cash.

When Microsoft announced its two $40 billion buyback authorizations, analysts were out front hailing the acts as “bold” and predicted they would be cheered by investors.

Quite obviously, shares in Microsoft have been a subpar investment, yet, to date, its largest shareholder continues to endorse the failed programs. If Mr. Gates would like to have more capital for his foundation, I would recommend he make better investments in technology, including joint ventures.  Imagine if someone at Microsoft had the foresight to invest in Facebook, or in one or several of the hundreds of successful internet based enterprises, at reasonable values, when such was possible. They didn’t see the tablet revolution, which one would think would have been “in their wheelhouse” given the billions they spend each year on R&D.

During the past 12 months MSFT spent almost $11 billion net, or 4.8% of its current market value to repurchase 3.8% of its current market value, continuing to prove the folly of share buybacks.

Share buybacks do nothing to improve return on invested capital, serve to bump up the cost of capital due to the shift in financial structure, and most often, are a reflection of managerial ineffectiveness in deploying the firm’s capital. Microsoft has certainly proven the latter to be true.


SIC: 7,372.000
GICS: 45103020
Purchase Com & Pref Stock Sale of Com/Pref Stock Net
Jun01 6,074.000 1,620.000 4,454.000
Jun02 6,069.000 1,497.000 4,572.000
Jun03 6,486.000 2,120.000 4,366.000
Jun04 3,383.000 2,748.000 635.000
Jun05 8,057.000 3,109.000 4,948.000
Jun06 19,207.000 2,101.000 17,106.000
Jun07 27,575.000 6,782.000 20,793.000
Jun08 12,533.000 3,494.000 9,039.000
Jun09 9,353.000 579.000 8,774.000
Jun10 11,269.000 2,311.000 8,958.000
YTD Mar 10,299.000 2,242.000 8,057.000
SUM 83,645.000




CT Capital LLC is an investment advisory firm based in Alpine, New Jersey, specializing in the detailed analysis of free cash flow, cost of capital, and return on invested capital.



Kenneth S. Hackel, CFA

Follow me on Twitter @ credittrends



Security Valuation and Risk Analysis: Assessing Value in Investment Decision-Making, Fall 2010, McGraw-Hill





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April 11th, 2011

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