I Screwed Up

I recently broke one of the cardinal rules of profitable investing.  I got impatient and sold a stock that I should continue to own today.

The company is Microsoft (Nasdaq: MSFT). In August, I told subscribers to my $100k Portfolio service that I would be selling the stock.

I had bought Microsoft shares back in May 2012.  The reasons were simple.  I liked the company’s dominant position in the PC software market. The stock was cheap. And the company was paying a decent dividend. 

But after owning the stock for 15 months – and seeing it go nowhere – I decided to pull the plug. The last straw was a disappointing earnings report that sent shares falling nearly 10%.

I still made a small profit on the stock…but nothing meaningful.  I sold it just 10 days before Microsoft announced a few big changes.

The biggest was the announcement of Steve Balmer’s retirement.  I viewed Balmer as an impediment to the company’s future success. And some large institutional shareholders – including the activist hedge fund ValueAct Capital – had been pressing for his departure.  The market embraced the news, sending Microsoft shares up by 7%.

But the far more exciting news for income investors was the bigger dividend and an aggressive share buyback program.

Last month, Microsoft announced a 22% increase in the dividend.  For the last decade, Microsoft has been a dividend achiever. The quarterly dividend has soared 250%.  With the dividend now at $1.12, the stock offers a 3.5% yield – a healthy premium to the 10-year Treasury bonds.

Even more impressive is the company’s new share buyback program. Microsoft announced one of the biggest buyback programs ever, with the board authorizing the repurchase of up to $40 billion of stock. Unlike most buyback programs, this one has no expiration date.

If the entire buyback were to take place at the current share price, Microsoft’s share count could be reduced by about 15%. And that’s a move that would immediately boost the company’s earnings per share.

Shares of Microsoft remain cheap, even after getting a small boost from the Balmer, buyback and dividend news.  At $33, the stock trades for just 12times forward earnings. That’s about a 15% discount to the average S&P 500 stock.

Things have started to change at Microsoft since August.  And I like what I see…

The software giant has only had two CEOs in its history…Bill Gates and Steve Balmer. Everyone knows that Gates became the world’s richest man and created amazing shareholder value at Microsoft. The stock soared from 1986 until 2000 when he moved into the role of chairman.

And with Balmer at the helm, Microsoft shares have languished. The stock has essentially traded for $25 – $30 for more than a decade. Now that he’s heading for the exits, it appears the Microsoft will be entering a new phase. 

The best thing would be a new CEO who is focused on creating shareholder value by making smart capital allocation decisions.  By focusing on returns for shareholders, a new CEO should take a more diligent approach to M&A, new products and R&D. In my view, that means a far greater emphasis on important capital allocation decisions.

It’s my hope that Bill Gates will tap his billionaire friend Warren Buffett to help with the decision. The right leadership at Microsoft would help deliver real value to shareholders in the years ahead.

In my $100k Portfolio real-money investment account, I’m considering buying back my shares of Microsoft. Things are changing at Microsoft, and a little patience could result in solid returns from this stock.

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