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
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
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
. 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
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
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
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