Microsoft’s renaissance shows that giant companies can occasionally find new opportunities to grow
Cris Sholto Heaton Investment columnist
Ten years ago, Microsoft was deeply out of favour. The tech giant was struggling to grow under Steve Ballmer, who had been CEO since 2000. It was earning solid profits from its near-monopolies in Windows and Office, but had failed to take advantage of new markets such as smartphones. Only value investors were talking up its prospects, and they were mostly drawn to steady cash flows from a boring business.
At the end of 2013, the shares were trading on about $37. Earnings per share that year were $2.58, putting it on a price/earnings (p/e) ratio of 14. A dividend of $0.92 meant a yield of about 2.5% – not exciting, but it had doubled in five years and could go higher if Microsoft accepted that it was ex-growth, stopped wasting cash, and settled for being a dividend machine.
Then in February 2014, Satya Nadella took over from Ballmer. Over the next few years, everything changed. The focus shifted away from Windows and Office as Microsoft committed to cloud computing. Today, Microsoft is the world’s most valuable listed company. The shares have risen tenfold to $400 during Nadella’s tenure. It is once again a high-growth stock and trades on 35 times forecast earnings. Still, those who bought for income haven’t lost out: the annual dividend of $3 is an 8% yield on the price a decade ago.
What a transformation can be worth
Microsoft is the most spectacular example of a large, mature business that returned to being a fast-growth one. Over the past decade, the S&P 500 Equal Weight index has returned about 10.5% per year. Microsoft has returned 27%. So an (implausibly prescient) investor could have paid far more back then and still matched the index. In fact, they could have paid more than $150 per share after factoring in dividends – equal to a p/e ratio of 60 – although nob
