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Comment by ghshephard | Hacker News Reader

Thank you. It never ceases to amaze me how many people fail to realize that you need to correct for dividends (One time, and otherwise) when calculating market cap.

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Can you (or someone else) please explain this in a little more detail? I understand the concept that a stock that pays dividends won't rise the same way as one that doesn't, but how does one "correct" for this effect to calculate market caps?

Are you implying that all those stories about Apple surpassing MSFT's market-cap were misleading due to this fact?

Thanks

One way to correct for dividends: assume the dividends are used to buy shares immediately after it goes ex-dividend.

I'd imagine you could just subtract the value of the dividend from the stock price. Someone correct me if I'm wrong.

If you buy a stock as a dividend stock, you might not really want it to rise much, or at all, since you want those dividends giving out the increased value rather than seeing it reflected in the market cap; ie. you want the company paying out the results of expansion.

As the article mentions the job of a CEO is to increase shareholder value, dividends are part of that value. MSFT has issued quarterly and sometimes annual dividends which are currently at 16 cents a share. In total, MS has issued $6.35 in dividends since 2005, this is fully 25% of the current stock price.

In fact the company issued a special $30 billion dividend early in Ballmer's tenure. The Federal Reserve had to correct for this in their quarterly report, because it was an economic event felt across the entire country.

Even so, it wasn't enough. Shareholders of MS stock realized a 25% return due to dividends over the last 6 years, nearly half of it due to that one $3 per share dividend. In contrast, Google shareholders realized a 177% investment gain, Amazon shareholders a 370% gain, and Apple shareholders a 900% gain. This would be fine if Microsoft were in a different industry than these guys, but they're not. If anything Microsoft's business is most similar to Apple's (or at least had been). Microsoft's failure to capitalize on markets other than their core OS/platform and Office is very, very much reflected in their current stock price.

Past performance is no indication of future performance. Looking back, buying Microsoft in 2000 with a P/E of 60 was a stupid thing to do. But, that says nothing about buying it today with a P/E of 10. IMO, Microsoft is a great value play and but nothing to write home about, however Apple (16x) is slightly over priced and Google (20x) is stupidly overpriced.

On the one hand this is sound analysis, Apple and Google do look stupidly overpriced, and MSFT does look stupidly underpriced. However, I think there is an underlying rationality to these phenomena. I am not convinced that MS will even be a major player in the industry in the next 20 years, due to failing to miss opportunity after opportunity in capturing new markets and reacting well to defend or migrate their existing high revenue products from disruptive innovation. Meanwhile, Google and Apple continue to expand their businesses at an impressive pace, in some cases creating new multi-billion dollar markets as they do so.

Given the expected substantial growth of per-capita wealth throughout parts of the developing world (e.g. much of Asia especially China, parts of India, much of South America, parts of Eastern Europe, etc.) and the consequent expansion of the population of the affluent, developed world the potential future market in the computer software/hardware/services industries is likely to be enormous. The companies that manage to cement themselves firmly into the future mainstream mechanisms for people to buy physical and digital goods online as well as the mechanisms for obtaining access to the online world will be well seated to collect substantial revenues from that expanded market. And Apple, Google, and Amazon are much better situated and seemingly much more capable of capitalizing on new forms of markets than Microsoft is. I believe all of that is, to varying extents, reflected in their respective stock prices, and I think it's a very valid view of the state of those companies.

Why should the market cap be adjusted to reflect dividends? Those have been paid out to shareholders and no longer represent assets of the company.

People invest in stocks in order to get a return. They pay the price of the stock because they believe the current and future value of the company is such that they will receive a higher amount of money when they sell the stock. Stocks that issue dividends modify that arrangement because one doesn't need to sell the stock at a higher price to receive a return, since the dividend is providing a return all the time.

The traditional view of efficient market stock valuation was that the stock price = the net present value of the future dividend stream. Of course, especially in technology, that doesn't really represent how things actually work. But theoretically stock price represents money you'll be paid out over time rather than some greater fool theory.

As for the basic point here though. Yes, an investor cares about total returns so dividends can't just be ignored.

Makes sense. Currently MSFT stock is valued at holding shares for approximately 24 years by that measure. That seems a bit low even so.

When comparing a dividend-paying stock to non-dividend paying stocks, the dividend-paying stock's price per share should be adjusted to incorporate the dividends paid (for comparative purposes only). As someone else pointed out, even if Microsoft's stock didn't gain a cent you would have made over $6 since 2005 from the dividends paid.

Since the comparative price of the stock would get adjusted to reflect this and market cap is a simple product of the price and shares outstanding, it does tangentially impact market cap (again, only for comparative purposes). Though a more direct way of stating this is that the value of the stock should be adjusted to reflect the returns from dividends.

I agree with you then, particularly when you say for comparative purposes only. My contention was that somebody evaluating the stock for purchase today should not include past dividends in the current market capitalization.

Simple example. A company had a market cap of $25. They have $5 in cash and decide to pay out a $5 dividend. The company now has $0 in cash and is now worth $20.

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