Microsoft (MSFT) and Altria (MO) grew Free Cash Flow/share at roughly the same rate between 2012 and 2022
Each company has delivered different total returns since the end of 2012 however.
Microsoft delivered a total return of 1423%.
Altria delivered a total return of 156%.
Microsoft grew FCF/Share from $2.93 in 2013 to $7.99 in 2022, which is a 173% increase.
The valuation multiple increased from 9 times FCF in 2012 to over 40 times FCF in 2023.
Altria grew FCF/Share from $1.86 in 2012 to $5.02 in 2022, which is a 170% increase.
The valuation multiple shrunk from 17 times FCF to 8 times FCF.
The remainder of total returns for each is explained by dividend reinvestment.
One share in Altria from end of 2012 turned to 1.89 shares through DRIPs today
One share in Microsoft from end of 2012 turned to 1.22 shares through DRIPs today
Ultimately, Microsoft delivered a higher total return because its valuation multiple expanded, while Altria’s valuation multiple shrank
It’s important to think about the sources of total returns. In general, total returns are a function of:
1. Dividends
2. EPS Growth/FCF Growth
3. Changes in valuation
The first two items are the so called fundamental returns. They are very important in the long-run, but not as much in the short run.
The last item is the speculative return. Its impacts are very pronounced in the short-term, but negligible over the really long-run
It is important to understand where returns comes from.
It’s fascinating that back in 2012 Microsoft sold at less than 10 times earnings and yielded about 3%
Everyone viewed it as a value trap
Yet an investor who bought at the end of 2012 is earning an yield on cost of 11.23%
Today, Altria is viewed as a value trap. Whether that turns out to be true or false, let’s circle back in a decade to find out.
I hope you enjoyed this!
