Wealth Creation Through Repeatability of Sales

When you look at Microsoft over the past ten years, the reason why it has managed to grow profits per share at a high double-digit rate is because it dramatically increased the repeatability of its sales. A decade ago, much of the profits were derived from the sale of Microsoft Office which was an event that required businesses to make a purchase every 2-3 years. Nowadays, Microsoft generates a substantial portion of its revenues through its cloud/data storage services where corporate America pays Microsoft a monthly fee for providing exceptional data services.

The dramatic increase in repeat business has been an important component in explaining why Microsoft has been able to deliver such strong returns to its shareholders over the past decade. Alas, Microsoft is now trading at a valuation of 30-40x earnings (depending upon whether you are forward or backward looking with your projections) and is not the best … Read the rest of this article!

AT&T: Bright Future After The DirecTV Acquisition

Over the past five years, AT&T only managed to grow earnings at 1% per year. You got to collect a 5% or 6% dividend along the way, which was a nice offset, but ultimately core business was not keeping up with inflation. This was due to three things: (1) the company was losing lucrative landline customers at a fast rate; (2) Verizon Wireless was making market share gains in the mobile space; and (3) the company was investing heavily into Mexican infrastructure that had a payoff several years down the line. This slow growth explains why the quarterly dividend has only grown by a penny per share during each year since 2007.

This acquisition of DirecTV is going to add $3 billion in annual profits immediately, and estimated cost savings of $1.5 billion per year for the next four years could make AT&T a company making $20 billion per year … Read the rest of this article!