microsoft investment, MSFTFounded in 1975, Microsoft (MSFT) is the worldwide leader in software.  Microsoft is the developer of the Windows operating system on which many personal computers run today.  Microsoft also offers its Microsoft Office suite of tools that most businesses use today including Microsoft Word, Excel and Powerpoint.  Microsoft is also the creator of the XBox gaming system that many people enjoy for everyday entertainment.  More recently Microsoft has been working on breaking into the Tablet and Smartphone markets with the release of their new Windows 8 operating system that can function on PC’s as well as different tablets like Microsoft’s own Surface tablet.

Microsoft has been going strong for investors who have stuck with them over the long term.  For dividend growth investors, Microsoft has more recently shown a dedication of paying increasing dividends.  They have managed to pay out an increasing dividend every year for the past 10 years.  Let’s take a look at how an investment in this software leader would have fared over the past 10 and 20 years.

A 10 Year Investment in Microsoft

Let’s take a look and see how you would have fared if you invested $5,000 in Microsoft stock exactly 10 years ago.  On January 17, 2003 you would have been able to purchase roughly 97 shares of Microsoft for $4,992 at a closing price of $51.46.  The most recent closing price of MSFT was January 18, 2013 when MSFT closed at $27.25.  During this time, MSFT had a two for one stock split so that your 97 shares became 194 shares.  Today your 194 shares would be worth roughly $5,286.50 for a return of 5.9% or a compound annual growth rate of 0.57%.

Clearly as an investor this is not the kind of return we should be looking for.  Because of the relatively flat returns MSFT stock has offered over the past decade, many people refer to MSFT stock as “dead money.”  However, if we look at the P/E ratio from 10 years ago, we would have been making a purchase in MSFT with a P/E of 55.  In my opinion, anyone willing to pay such a high valuation was taking a risk of having flat or even negative returns going forward.  Over the decade MSFT performed spectacularly as a company growing their EPS in 9 out of 10 years.  The stock return does not reflect this because the stock valuation is coming back down to what is considered more normal.  Most likely this is occuring because MSFT’s earnings growth rate has slowed down from the extreme growth they were experiencing in the early years of the company’s history.

While market returns have been fairly flat over the past 10 years, lets not forget about the dividends you would have received during those 10 years as well.  Over the course of the past 10 years you would have received a total of $1,462.76 in dividend income.  This means that your total return over the past decade of owning Microsoft stock has been 35.21% or 3.06% compounded annually.  Still not great but it is better when you consider dividends recieved.

So over the past decade while owning Microsoft shares you have enjoyed a 3.06% compounded annual return.  You have been paid in cash dividends $1,462.76.  You could have used that dividend income to help with some of your expenses such as groceries or utility bills.  Or you could have reinvested those dividend payments and your total return would have been even better.  MSFT hasn’t been the best investment if you bought it 10 years ago.  However, it is evident that the stock was overvalued 10 years ago and other investment options should have been pursued instead.

A 20 Year Investment in Union Pacific

A 10 year investment in Microsoft wasn’t so hot due to the company’s valuation a decade ago.  How about a 20 years investment?  Lets take a look at how you would have fared had you invested $5,000 in Microsoft stock 20 years ago.  On January 18, 1993, MSFT stock closed with a price of $89.25.  You would have been able to buy 56 shares for a total price of $4,998.  Since that date there has been five 2 for 1 stock splits.  Today you would have a total of 1,792 shares worth a total value of $48,832.  This would give you a return of 877% or 12.01% compounded annually.

Once again don’t forget about all the dividend income you would have received over the past 20 years by just owning your Microsoft shares.  Over the past 20 years you would have received a total of $13,511 in dividend income from MSFT.  This means that your total return over the past 2 decades of owning Microsoft stock has been 1,147% or 13.45% compounded annually.

So a 20 year investment in Microsoft earned you a total return of 13.45% compounded annually.  You would have received $13,511 in dividend income to either offset your expenses or reinvest in the company.  Had you reinvested in more Microsoft stock your returns would have been even better.

Conclusion

Microsoft is an interesting stock to look at over the past two decades.  During the 90′s, MSFT was the hot stock that was on a hot streak upwards.  The wonderful results you would have recieved by owning MSFT during the 90′s made up for the the dismal performance of the 2000′s.  I think it is safe to say MSFT won’t ever see the spectacular results that they enjoyed during the 90′s.  However I feel pretty good about MSFT over the next decade and don’t believe it to be “dead money” like the owners during the last decade experienced.  You can read more about how I feel about Microsoft currently in my recent Microsoft stock Analysis.

I want to point out that I am not taking into account the companies valuation 10 or 20 years ago.  I am merely looking at how you would have fared if you had purchased the stock 10 or 20 years ago.  If the company was overvalued at the time of your purchase, your returns will generally be low like the last decade.  If the company was undervalued at the the time of your purchase, returns generally will do well.  Stock valuation at the time of purchase is one of the most important things to take into consideration.  Even a great investment will not turn out great if you pay too much for it.

What do you think?  Do you own Microsoft stock?  Would you have been happy with these returns over the past couple decades?  Where do you see this company going in the future?

Disclosure: I am long MSFT and considering adding to my position in the next couple weeks.

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