By Karl Smith
In 1964, GM was the largest and most profitable company in the world. If I remember correctly, it was second only to Soviet State Enterprise as the largest industrial concern, public or private, in the world.
However, if in 1964 you had invested in GM you would have lost money. That is, the discounted present value of all dividends you received from GM stock would not have made up for the price of the stock. Of course, those dividends stopped in 2008, never to return again. Any dividends from the new GM will go to a new set of owners.
Today it appears as if Microsoft (MSFT) is embarking on a similar pattern. Microsoft is the most profitable non-petroleum company in the world. It is paying out an annual dividend of approximately $4.5 billion but is on track to lose nearly $3 billion from its Online Services Division, that part of the company that competes with Google (GOOG).
Those losses, however, are steadily growing.
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It is conceivable that Microsoft will begin losing more money in Online Services by 2012 than it pays out to shareholders.
Moreover, Microsoft’s current dividend yield is 2.27%. 30-year inflation adjusted U.S. Treasury bonds are selling at 1.9%, meaning that if Microsoft is able to maintain its dividend and survive its war against Google, Apple (AAPL), Facebook and whoever else happens to evolve over the next 30 years, its shareholders will have beaten TIPS by 0.37%.
Moreover, given that TIPS routinely underperform regular Treasuries, Microsoft will have to survive and maintain the real dividend in order to break even with government securities. In discounted present value terms, Microsoft has to stay alive and maintain the real dividend for investors not to lose money.
Now it is possible that Microsoft will thrive, raise the real dividend and deliver real gains to its shareholders. Yet it is equally possible that Microsoft will lose in the new environment, go out of business or be forced to limit its dividend increases to less than the rate of inflation.
There is a simple way out of this: shut down the Online Services Division, double or even triple the dividend and pay out the current profits to shareholders.
What’s your guess on the probability that Microsoft will do this?
My sense is that this burning of the corporate commons is a major source of loss in the U.S. economy. In essence Microsoft is captured by its corporate bureaucracy, a group that is more interested in the continued existence of the company than in maximizing profits. The entire point of capitalism is creative destruction: Old firms die as new innovators come along. However, modern firms lock up much of their profits in a war chest designed to keep them from dying. This is pure economic loss. It’s bad for shareholders and its bad for America.
