Briefly Noted

    Microsoft Dividends: Take the Money and Run?

    “Investment pundits in general and Microsoft shareholders in particular cheered the recent announcement of $32 billion (that’s billion with a “b”) dividend distribution to pare down its Brobdingnagian cash hoard. This may spur other companies with lots of stash to either buy back shares or pay out a large dividend. While I don’t want to rain on the shareholders’ parade, the shower of dollars may portend something far less cheerful. Way back when I was studying finance in college, I learned more than once that the reason a company distributes a dividend is because management has concluded that the company is not likely to earn a better return on that money than the shareholders themselves could earn. Perhaps that theory is old-fashioned, but I doubt it. So is it possible that Messrs. Gates, et al., have decided that Microsoft has pretty much exhausted its ability to develop innovative and highly profitable products and instead are doling it out to shareholders who can come up with more profitable investment ideas?”

    Jonathan Pond in the Summer 2004 issue of Jonathan Pond’s Quarterly Investment Review

    Fortune's Balancing Act: Value vs. Growth

    “Talk about a reversal of fortune: mid-cap value stocks that trailed mid-cap growth stocks so pitifully in 1999 have outperformed by 8.4 percentage points annualized over three years and 6.6 percentage points annualized over five years as of May 31, 2004, as the table below shows. . . .”

    Annualized Total Returns Through May 31, 2004
      3 Years 5 Years
    Russell 1000 Growth Index -4.9 -5.4
    Russell 1000 Value Index 1.4 2
    Russell Midcap Growth Index -0.3 1.5
    Russell Midcap Value Index 8.1 8.1
    Russell 2000 Growth Index -0.4 -0.1
    Russell 2000 Value Index 11.8 12.5

    “History suggests that the current poor relative track record of growth stocks in all capitalization segments won’t last, that growth stocks should enhance their performance in the years ahead. If so, it would simply be the latest chapter of an investment saga stretching back to 1937, documenting how growth stocks have alternately been in favor and in disrepute at different times. As growth stocks floundered in some years, they subsequently, inexorably reverted to the mean and gained a performance edge over value stocks.

    “In essence, the stock market in the long term has tended to reach an equilibrium between growth and value, and sooner or later a dramatic tilt in one direction has generated a counterbalancing force in the other. As a result, over time both growth and value stocks have produced remarkably similar results. In the past 67 years, growth stocks, as represented by the S&P/Barra Growth Index, have gained an annualized 10.8%, and the S&P/Barra Value Index has advanced an annualized 10.6%.”

    Turner Investment Partners in the June 24, 2004, Turner Investment Advisory newsletter

    Rising Rates and Portfolio Performance

    “In recent months, the markets have scrutinized every word of the speeches and statements coming from the Federal Reserve in search of hints on the direction of monetary policy. Last August the Fed promised to maintain low interest rates for a ‘considerable’ period. By January 2004 this verbiage had been replaced by statements from the Fed that it could be ‘patient’ about raising interest rates. Finally, in May of this year, the Fed acknowledged that it would be raising interest rates, but that rate hikes would be implemented at a ‘measured’ pace.

    “These seemingly small changes in language have had a pronounced impact on bond yields. These changes—in addition to strong economic growth, an improving job market, and accelerating inflation—have made it clear that the scales have tipped toward higher interest rates in the United States . . . .”

    “[C]ertain strategies for stocks and bonds can protect asset values in a rising-rate environment. To begin with, technology companies tend to be less sensitive to interest rates, as much of their funding comes from equity and their debt servicing is minimal. As the yield curve begins to flatten, as is the case in many tightening cycles, financial companies that have been lending in the overnight market fare well.

    “Bond portfolios can also be adjusted to help manage risk. By reducing exposure to Treasuries and shortening duration, a portfolio’s sensitivity to rising rates can be improved. Attractive investments include issues that are less sensitive to rate changes and guided more by underlying fundamentals. Examples would be corporate bonds with improving balance sheets, both investment grade and high yield. The highest-quality corporate bonds are more influenced by overall rates than lower-quality issues, hence the key to this strategy is finding a lower-rated bond that could be an upgrade candidate. . . .”

    “If inflation grows to a level of concern, TIPS offer an alternative. The inflation protection can help to offset price depreciation as the yields of the securities rise with the tide.

    “Only time will tell if rates will rise significantly or simply adjust to more neutral levels. But at the present time, the economic data do not seem to warrant an aggressive rise in rates. In any environment, adherence to fundamentals is key when positioning your portfolio. Therefore, the lesson is not to get too caught up in the movements of the market, but instead to base one’s decisions upon those fundamentals.”

    Payden & Rygel, in its July 2004 Quarterly Review