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Comment by axiom | Hacker News Reader

Microsoft issues dividends. Google and Apple don't.

Thank you. It never ceases to amaze me how many people fail to realize that you need to correct for dividends (One time, and otherwise) when calculating market cap.

Can you (or someone else) please explain this in a little more detail? I understand the concept that a stock that pays dividends won't rise the same way as one that doesn't, but how does one "correct" for this effect to calculate market caps?

Are you implying that all those stories about Apple surpassing MSFT's market-cap were misleading due to this fact?

Thanks

One way to correct for dividends: assume the dividends are used to buy shares immediately after it goes ex-dividend.

I'd imagine you could just subtract the value of the dividend from the stock price. Someone correct me if I'm wrong.

If you buy a stock as a dividend stock, you might not really want it to rise much, or at all, since you want those dividends giving out the increased value rather than seeing it reflected in the market cap; ie. you want the company paying out the results of expansion.

As the article mentions the job of a CEO is to increase shareholder value, dividends are part of that value. MSFT has issued quarterly and sometimes annual dividends which are currently at 16 cents a share. In total, MS has issued $6.35 in dividends since 2005, this is fully 25% of the current stock price.

In fact the company issued a special $30 billion dividend early in Ballmer's tenure. The Federal Reserve had to correct for this in their quarterly report, because it was an economic event felt across the entire country.

Even so, it wasn't enough. Shareholders of MS stock realized a 25% return due to dividends over the last 6 years, nearly half of it due to that one $3 per share dividend. In contrast, Google shareholders realized a 177% investment gain, Amazon shareholders a 370% gain, and Apple shareholders a 900% gain. This would be fine if Microsoft were in a different industry than these guys, but they're not. If anything Microsoft's business is most similar to Apple's (or at least had been). Microsoft's failure to capitalize on markets other than their core OS/platform and Office is very, very much reflected in their current stock price.

Past performance is no indication of future performance. Looking back, buying Microsoft in 2000 with a P/E of 60 was a stupid thing to do. But, that says nothing about buying it today with a P/E of 10. IMO, Microsoft is a great value play and but nothing to write home about, however Apple (16x) is slightly over priced and Google (20x) is stupidly overpriced.

On the one hand this is sound analysis, Apple and Google do look stupidly overpriced, and MSFT does look stupidly underpriced. However, I think there is an underlying rationality to these phenomena. I am not convinced that MS will even be a major player in the industry in the next 20 years, due to failing to miss opportunity after opportunity in capturing new markets and reacting well to defend or migrate their existing high revenue products from disruptive innovation. Meanwhile, Google and Apple continue to expand their businesses at an impressive pace, in some cases creating new multi-billion dollar markets as they do so.

Given the expected substantial growth of per-capita wealth throughout parts of the developing world (e.g. much of Asia especially China, parts of India, much of South America, parts of Eastern Europe, etc.) and the consequent expansion of the population of the affluent, developed world the potential future market in the computer software/hardware/services industries is likely to be enormous. The companies that manage to cement themselves firmly into the future mainstream mechanisms for people to buy physical and digital goods online as well as the mechanisms for obtaining access to the online world will be well seated to collect substantial revenues from that expanded market. And Apple, Google, and Amazon are much better situated and seemingly much more capable of capitalizing on new forms of markets than Microsoft is. I believe all of that is, to varying extents, reflected in their respective stock prices, and I think it's a very valid view of the state of those companies.

Why should the market cap be adjusted to reflect dividends? Those have been paid out to shareholders and no longer represent assets of the company.

People invest in stocks in order to get a return. They pay the price of the stock because they believe the current and future value of the company is such that they will receive a higher amount of money when they sell the stock. Stocks that issue dividends modify that arrangement because one doesn't need to sell the stock at a higher price to receive a return, since the dividend is providing a return all the time.

The traditional view of efficient market stock valuation was that the stock price = the net present value of the future dividend stream. Of course, especially in technology, that doesn't really represent how things actually work. But theoretically stock price represents money you'll be paid out over time rather than some greater fool theory.

As for the basic point here though. Yes, an investor cares about total returns so dividends can't just be ignored.

Makes sense. Currently MSFT stock is valued at holding shares for approximately 24 years by that measure. That seems a bit low even so.

When comparing a dividend-paying stock to non-dividend paying stocks, the dividend-paying stock's price per share should be adjusted to incorporate the dividends paid (for comparative purposes only). As someone else pointed out, even if Microsoft's stock didn't gain a cent you would have made over $6 since 2005 from the dividends paid.

Since the comparative price of the stock would get adjusted to reflect this and market cap is a simple product of the price and shares outstanding, it does tangentially impact market cap (again, only for comparative purposes). Though a more direct way of stating this is that the value of the stock should be adjusted to reflect the returns from dividends.

I agree with you then, particularly when you say for comparative purposes only. My contention was that somebody evaluating the stock for purchase today should not include past dividends in the current market capitalization.

Simple example. A company had a market cap of $25. They have $5 in cash and decide to pay out a $5 dividend. The company now has $0 in cash and is now worth $20.

Can you expand on that comment? I have no idea what this is supposed to mean. Should this change how we interpret the stock price growth comparison between Microsoft, Apple, and Google?

Just thinking about it, I only see two ways in which that would change the stocks valuation. On the one hand, it must reduce the capital that Microsoft has on hand, which might reduce the price of the stock. On the other hand, I would imagine that the fact that owning Microsoft gives you real value in the form of an (quarterly?) payout might increase the stock's price. One can still buy and sell the stock just like a stock that doesn't pay a dividend, betting on the future success of the company, plus you get money on a regular basis. Is there some other way it relates? I really don't know much about this.

You can make money by buying a stock, having the business get more valuable so the stock goes up, and selling the stock at a higher value. Or you can make money by buying a stock, having the business make money and pay it out to you in dividends.

At the end of the day, what matters here is how much money you make and how long it took you to get it, which is a function of sell price - buy price + dividends received - transaction costs and taxes paid. This chart ignores the dividends received part, and thus misrepresents the value of the stock. I don't know how big the dividend is so I don't know by how much. I doubt it would really make -50whatever% a whole lot better, but it would certainly be something better.

Traditionally dividends are generally paid out by businesses that can't reasonably expect to use their cash to grow - reinvesting all your cash to grow may not make sense if your growth is limited by geography or by completely owning an entire market. The textbook example is a utility company.

Correct me if I am wrong, but I believe an additional benefit is that the tax rate on dividends is substantially lower than that of capital gains.

You're wrong. The long term capital gains tax rate in the U.S. is 15% for most people. The tax rate for "qualified" dividends (essentially, dividends on stock that you've held for awhile) is 15%. Starting in 2013, dividends will be taxed at your ordinary income tax rate (which is the way they used to be taxed), while long term capital gains will be taxed at 20%, which means that for most people, dividends will be more highly taxed than long term capital gains.

Ah. Thanks for the correction. The information I had must have been dated, looking here[1] it does appear that my information was old (probably from the 2003-2007 timeframe). I could have also been misremembering, and in fact the original data was probably comparing income tax to dividends tax. Good thing I am not an accountant!

It does seem that recent changes have again adjusted the tax rate. In fact, based on more information[2], it seems long term capital gains tax is in fact lower (while short term is the same as dividend tax).

[1]: https://secure.wikimedia.org/wikipedia/en/wiki/Dividend_tax#...

[2]: https://secure.wikimedia.org/wikipedia/en/wiki/Capital_gains...

(updated for formatting)

Even a company that's growing ought to pay dividends in most cases. After all, if your shareholders have faith in continued good business they have the option of reinvesting their dividends. Companies that don't pay out are essentially telling you that your money's better off in the company, which strikes me as a rather arrogant way to treat your owners.

Dividends are basically saying "we're returning earnings because you can probably invest them better than we can". It's up to the investor balance their portfolio and decide how much money they have invested in the company, dividends are supposed to be that mechanism.

Sure, and as a shareholder I can say that I always know better. In reality I probably don't, but it's a matter of principle. We own this company, and they're telling us that they'd rather use all the profits they generated (out of the money we provided) for themselves.

It's not that I think every company should always pay out a dividend. It doesn't make sense if you're growing fast, or losing money. Berkshire doesn't have to because we generally agree that Buffett's a better investor than the rest of us. For the vast majority of companies not in these categories though, it seems like the shareholders would be better off if they just got the cash.

No, not for themselves; for their shareholders – ie for you. They're saying that there's an illiquid opportunity they can access which you can't.

You might disagree with them; if you do, sell the stock.

> "Even a company that's growing ought to pay dividends in most cases."

That's not true. Companies have opportunities to invest money into things that a normal investor cannot. If a company can invest the money at an above average rate it should.

For US investors, it's even more clear cut as dividends would be taxed if payed out. If the company instead retains and prudently invests that money, the company in essence is able to generate a return on money that would have been payed as taxes. Over the long haul, that "float" is extremely valuable.

It shouldn't change how you interpret the stock price growth, but it should change how you interpret the total return of the company.

The graph that was shown is misleading because it only represents the share price growth over the last ten years, which was down (or flat). For much of that time Microsoft was paying quarterly dividends, which means shareholders were yielding some return from their Microsoft stock even if the share price wasn't appreciating.

One way to look at this is to track the market value of a company less its cash horde. It is a safe bet to assume that none of these companies is earning much beyond money market rates, except when it is adding (or subtracting!) value by investing in its own projects. Of course in this world of financial opacity, you can't easily estimate cash more often than quarterly. The cash-less value chart would be pretty interesting.

“I think the day Berkshire declares a dividend is a day when the stock goes down,” he says. “As it should.”

-Warren Buffett

http://dealbook.nytimes.com/2011/04/30/live-blogging-the-ber...

Interesting choice of words on his part. The stock goes down for every company. Anytime a dividend is declared the stock price is adjusted down by that same amount.

That's true.

Though he also said this (it was paraphrased by a reporter, so it's not a direct quote):

Shareholders benefit more from leaving their money with him and reaping a handsome return than by getting a regular payout and depleting the Berkshire war chest.

*Same source as above

Interesting. If a company pays dividends, does that mean it doesn't have confidence that it can make as much money as its investors could make by investing their money elsewhere?

Isn't that sort of the definition of a dividend?

Microsoft has also repurchased a lot of stock over this period which should inflate the stock price.

In any case, it doesn't matter that much especially given a relatively small number of years and a stagnant price per share. The general premise of Microsoft stagnating is true regardless of how you tweak the numbers.

Buying back stock increases earnings per share, not the stock price.

Yes, and increasing earnings per share generally increases stock price.

In theory you only buy shares back when you believe that they are worth more than they are trading for. If this is true, it will increase the intrinsic value of the company and should increase its price per share. If it is not true, then management is incapable of evaluating their own business and shareholders should demand that all non-essential capital be returned to shareholders in the form of dividends.

In either case, my point still stands. These things don't matter enough to be bickering about them. From January 2000 to present the Nasdaq is down about 29%, for Microsoft to only be down that amount your adjusted price would need to be about $40. You need to be very generous to say that those dividends we're worth ~$15 and that's just to match the Nasdaq.

If you really want to argue with the data you should be arguing about the start/end dates. Comparing to the Nasdaq eliminates some of the problem as most tech stocks were equally inflated in 2000. I still think you're looking at near parity at best. Microsoft should have been better than average and the data shows that it probably wasn't.

Buying back shares doesn't raise the stock price because it doesn't change the underlying fundamentals. If the stock goes up after a buyback, it only stays up if there was a reason other than a share buyback.

If you don't overpay for the shares, your enterprise value should be the same or slightly higher. So market cap should be flat to slightly higher but there are fewer shares outstanding so price per share would go up. When buybacks don't increase share price, by definition market cap must be decreasing.

The market cap goes down. The company has less cash, and that cash was priced into the market cap.

If you yourself had a a market cap of $25 including the $5 in your wallet, giving away that $5 would lower you market cap to $20.

Actually, when buying back stock you're essentially reducing the number of shares outstanding, which, all else equal, would translate into a higher stock price.

That confuses me. When the company buys back shares they don't just disappear, do they? With 1 million outstanding shares owning 50% of a company and the company buys back 500k, then there are 500k shares owning 25%. Why would those shares' value increase?

Yes, the shares disappear. A company cannot own itself, at least not directly. If a company had 3 million shares outstanding, then buys back 1 million shares, there would then be 2 million shares.

So do the remaining shares own more of the company?

Yes. When a company buys back shares, those who do not sell end up owning a larger percentage. It would be the same if you were paid a dividend and then used that dividend payment to buy additional shares of stock.

Doesn't that support the OPs point ? The reason MSFT issues dividends, like any steward of shareholder capital, is because they realize that their shareholders can generate higher returns on that cash than they can.

Given that MSFT is a tech company, and we have seen many major tech companies started and grown to almost MSFT's size in the last decade, it does support the OPs point that clearly Ballmer missed a few things.

MSFT missed search. Great. They missed the music play, great. They missed the phone play. Great. Now they missed social media. How many things do they have to miss before someone says Ballmer has to go.

It is precisely because they are a 'high-tech' company AND paying dividends that validates the OPs original point...in my humble opinion.

Edit: That being said, them paying dividends will affect the stock price for sure. But, he was just using the stock price as a proxy for Ballmer's performance.

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