Microsoft (MSFT) and Altria (MO) grew Free Cash Flow/share at roughly comparable rates between 2013 and 2024.
Each company has delivered different total returns since the end of 2013 however.
Microsoft delivered a total return of 1305%.
Altria delivered a total return of 155%.
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.
Let's break it down:
Microsoft grew FCF/Share from $3.22 in 2014 to $9.97 in 2024, which is a 210% increase .
The valuation multiple increased from 11.60 times FCF in 2014 to over 44 times FCF in 2024.
Altria grew FCF/Share from $2.12 in 2013 to $6.07 in 2023, which is a 186% increase.
The valuation multiple shrunk from 18 times FCF to 8.30 times FCF.
The remainder of fundamental total returns for each is explained by dividend reinvestment.
One share in Altria from end of 2013 turned to 1.92 shares through DRIPs today.
One share in Microsoft from end of 2013 turned to 1.19 shares through DRIPs today.
Ultimately, Microsoft delivered a higher total return because its valuation multiple expanded, while Altria's valuation multiple shrank.
I hope you enjoyed this!