It’s not just warm feelings about Satya Nadella that have Microsoft shares trading near a 14-year high.
Excitement at the vision of Microsoft’s chief executive has played a role in the near doubling of Microsoft shares in the past two years, sure (for more on that, see my analysis of the rise from Sunday’s paper). But analysts say cost cuts and a healthy dose of financial engineering are also a major part of the story.
Microsoft spent $27.9 billion during its past two fiscal years to make its stock more attractive to investors. About 60 percent of that was paid in cash dividends, while the rest went to repurchase the company’s shares. By comparison, Microsoft spent $21.8 billion on research and development in that same period.
An emphasis on shareholders isn’t abnormal for a company like Microsoft.
The theory holds that investors buy shares in a young company — like, say, Microsoft of the 1990s — hoping to profit from its rising share price as the firm enters new markets and wins business.
More mature companies — Microsoft circa 2014 — often find that kind of growth harder to come by even if they throw more cash at the problem. Many increase their payouts to investors in a bid to keep Wall Street interested and avoid shareholder revolts.
Microsoft has boosted its dividend every year since 2009. Investors are always eager for more from a cash-generating machine like Microsoft.
Cost cutting has also been a boon to the stock. Microsoft shares climbed nearly 4 percent, their second biggest gain in the past year, as news filtered out in July that Microsoft would lay off 18,000 employees.
Under the leadership of Nadella and finance chief Amy Hood, some observers say Microsoft’s cost cuts have gone deeper than those overseen by former CEO Steve Ballmer. The primary target of those cuts has been the Nokia handset unit Microsoft bought in April. The cuts have gone broader than that, though, touching core Microsoft business groups including research, marketing, engineering and computer security.
Shareholders are hoping for more.
Cost cutting in “is one [issue] I spend more time talking to investors about than the cloud or the PC market,” said Karl Keirstead, an analyst with Deutsche Bank. “You could argue that Microsoft over the years got a little fat,” he said. “They’re trimming.”
That trimming could lead to lasting gains, for employees and investors alike, if the savings are put to work reinvigorating the company and freeing up cash to put to work in faster-growing segments such as cloud computing or artificial intelligence-like data mining.
As with all companies, though, there’s a danger that pressure from investors will push Microsoft executives to sacrifice the company’s long-term prospects at the altar of higher share prices now.
Nadella seems keenly aware of that risk. In a conference call with Wall Street analysts after reporting quarterly earnings in July, a financial analyst more or less asked Nadella if he planned to boost the cash payments to shareholders after the more than $15 billion shipped their way in the company’s last fiscal year.
Nadella answered that the company’s success in cloud-computing was proof Microsoft still could still break into new markets. The core of Microsoft’s business, he said, is finding those kind of opportunities to bolster “the long-term health of this company.”
That said, he reiterated that the company would take a “balanced” approach to potential new share buybacks and dividends.