As regular readers will know, I think many low-risk defensive “bond proxy” stocks are probably too expensive.
Although I usually only talk about UK stocks, I thought I would take a look at two high-profile examples of the bond proxy genre from across the pond: Coca-Cola and Microsoft.
I chose those two companies because Warren Buffett is known for being a big Coca-Cola investor, and also for not being a Microsoft investor. They also represent two very different types of bond proxy, with one focused on the low-tech world of soft drinks and the other focused on the high-tech world of computers and software.
I have no doubt that they’re both great companies with impressive track records, but at current prices are they attractive investments?
Is Buffett Right to Choose Coca-Cola over Microsoft?
Hi John
I like the PDF – what package was it put together with (a Microsoft one or something more professional ?
Best wishes
VegPatch
Hi Veg, I have no idea. The magazine is put together by the good people at Master Investor magazine:
https://masterinvestor.co.uk/contact-us/
I just write the article in MS Word and they take it from there. The editor is James Faulkner, so it might be worth asking him.
Hi John,
I did look at Microsoft in April this year, and used your company analysis spreadsheet to see how the company looked. My analysis came up with three positives and three negatives, so i did not invest, and your blog reinforces this decision.
Thanks
Geoff.
Hi Geoff, well as least I managed to be consistent with my own spreadsheet!
One aspect of my analysis worth mentioning is that I valued it against all the stocks in my stock screen, which are UK-based whereas Microsoft obviously isn’t.
It would be interesting to see how Microsoft stacks up for US investors by building an identical stock screen using S&P 500 and Dow 30 stocks.
My guess is that Microsoft would look more attractive relative to other US stocks because the US market is so expensive right now compared to the UK market. But as a UK investor this is only of academic interest, and building a US stock screen just to get an alternative view of Microsoft probably isn’t worth the effort.
John, I never invested in Coca Cola, sadly — but I did in Microsoft.
I think the problem with Microsoft, is that few people understand it today and assume it’s business is old technology and declining relative to the Google’s and Amazon’s of this world.
Fortunately for me, that misses the point and I have been able to remain invested since $10 and added to it every year since then, to the point that it’s my 3rd largest holding.
The shift in emphasis in the company has been remarkable in the last few years alone under Nadella and the extent which the business has become relatively hardware agnostic is still missunderstood and not picked up by most analysts.
The 365 program illustrates that perfectly with the full on move to mobile platforms, but more importantly the relevance of the cloud business is also misunderstood. It’s not a super commoditised event as many consider with AWS (Amazon), Microsoft and Google as the leaders.
Whilst Microsoft holds the number 2 position in cloud provision, it’s growth rate far outstrips AWS and Google.
The real strength is seen from it’s underlying earnings growth with net income having grown from £12Bn in 2015, to £16.8Bn in 2016, to £21.2Bn in 2017.
In essence Microsoft has multiple businesses who’s piece part values are probably much greater than the whole today.
Microsoft trades on a forward P/E of 22 which for a company with it’s current growth potential is astonishingly cheap. In 2000 Microsoft traded at a P/E of 57.
Take a look at Polar Capital’s Technology presentation to see the expansion of data usage and the projections for the next 10 years to realise the potential here and the fact that Microsoft will be in a somewhat unique position to capitalise on this.
This realistically ignores the potential for Microsoft in AI – with over 8,000 R&D people working in it.
Also, Linked-In which, despite my early scepticism has turned out to be a great success.
Microsoft’s best days lie ahead, and not behind.
Here is another article that might stimulate the doubters :- It’s a very simple analysis but nonethless from someone who is quite a-technical.
https://www.fundsmith.co.uk/news/article/2014/01/24/financial-times—just-the-facts-when-weighing-investments
LR
Some interesting points in there but none of it makes much difference to my somewhat more negative analysis. I’m sure Microsoft has a great future (probably) but my opinion is that size and growth rate are inversely correlated in the long-run, and Microsoft has been a good example of that for several decades and will (probably) continue to be in the future.
I suggest we come back here in 2027 to see how things turned out…
Merry Christmas!
I don’t know if this has been pointed out but Buffett can’t by Microsoft given that Gates is on the board of Berkshire. So the premise of the question is misleading .
Hi Andrew – Yes, this post was re-published on Seeking Alpha and the (US-based) audience there pointed that out multiple times! With hindsight it was not the best way to link the two companies.
Basically I wanted to look at some US stocks which is something I almost never do. So I chose Coca Cola and Microsoft as two very different but equally high profile examples of quality dividend growth companies. The Buffett reference was just a way to tie the two companies together for the purposes of the article, but really it’s irrelevant from an investment analysis point of view.
It’s a shame that such an irrelevant aspect of the article ended up overshadowing the more important points about the growth rates and valuations of those two companies. I’ll be more careful about mentioning Buffett in future because it seems to make a lot of people very cynical about the underlying motives for the article.