The US vs Microsoft - who's winning the race with investors?
Company valuations have always kept the global economy in suspense. However, recently there hasn't been much good news in this area. Microsoft is an exception. In April, Fitch gave the company a ‘AAA’ rating, making Microsoft the only remaining blue-chip company with the best possible rating from all the major rating agencies. “As a comparison, in the 1980s, nearly 60 companies still had the top rating. The list ranged from General Electric to Pfizer and Merck to Coca-Cola and UPS. Over time, however, none could resist cheaper financing conditions, so their debt levels rose and their credit ratings fell,” explains Dr Tobias Burggraf, Portfolio Manager at Ethenea Independent Investors S.A.. Burggraf takes Microsoft’s rating as an opportunity to take a closer look at the company. As a benchmark, he uses US Treasuries, which are generally among the safest assets in the world, and compares both values over four rounds: rating agencies, financials, yields, and sustainability.
Round 1: Rating Agencies
“What gives Microsoft's credit rating such a stable foundation is the company’s strength in the tried and true software business around the Windows operating system, coupled with its rapidly growing cloud business. This combination is an important reason for the top rating from the major agencies,” Burggraf explains. The US, on the other hand, would only be rated AAA and with a stable outlook by Moody’s, while Fitch gave the AAA rating a negative outlook in July 2020. “S&P already downgraded the US to AA+ in August 2011. While they still recognise the appeal of the world’s largest economy, rising public debt and budget deficits, which have built up over the past decade and jumped again during the pandemic, continue to be inhibiting factors and prevent a further upgrade of the rating.”
US versus Microsoft 0:1
Round 2: Financials
In terms of financial figures such as cash, debt, and earnings, Microsoft is doing equally well. At USD 125 billion, Microsoft has more cash than debt (USD 81 billion), making it virtually debt-free on a net basis. In contrast, the debt burden of the United States continues to rise due to its large budget and current account deficits. “The US national debt has passed the USD 28 trillion mark and is growing by USD 2.1 trillion in the current fiscal year. There are no signs that this debt will be significantly reduced in the foreseeable future,” is Burggraf's assessment of the situation.
US versus Microsoft 0:2
Round 3: Returns
At first glance, this round seems equally clear: a 2028 bond issued by Microsoft still yields a higher return than a bond issued by the US Treasury. For example, a 2028 Microsoft bond with an interest rate of 2.40% yields about 0.88% at a current price of USD 106.5, while a comparable US Treasury bond yields 0.80%, giving a spread of about 8 basis points. And Microsoft continues to catch up. “While the spread was around 75 basis points in 2016, the difference has narrowed over time, with the exception of the most turbulent period of the pandemic, when the spreads of corporate bonds over sovereign bonds skyrocketed," the Portfolio Manager says.
“It is entirely conceivable that spreads will narrow further in the future, but the Covid-19 crisis has once again demonstrated the strength and key selling point of US Treasuries. In times of financial and economic uncertainty, they are almost the only asset class that offers a hedge against price losses.”
US versus Microsoft 1:2
Round 4: Sustainability
Sustainable investment management is a topic that is steadily growing in importance. Even though a comparison between companies and countries may be difficult, Tobias Burggraf takes a look at the most important ESG scores for Microsoft, which make a strong showing here. MSCI gives Microsoft an ESG rating of AAA, and the company's Sustainalytics ESG Risk Score is 14.6 (low risk, 11th out of 308 companies in this sub-sector).
“According to a recent study, FTSE Russell estimates that US GDP per capita would be about 20% lower in a world severely affected by climate change than in a world entirely without climate change. This means the US would only rank 19th among 26 countries surveyed,” Burggraf said. “Freedom House's Global Freedom Score focuses on socio-social factors such as freedom of expression or equality before the law. Here, the US ranks 58th out of 210 countries, which is better than average, but again does not place within the top 25%."
Final score: US versus Microsoft 1:3
Dr Tobias Burggraf takes stock: “Microsoft bonds are now yielding close to US Treasuries, which are considered risk-free. It is quite possible that the yield difference will narrow further in the future. As there are few AAA-rated bonds on the market, Microsoft remains an attractive investment for risk-conscious investors, particularly institutional investors such as insurance companies and pension funds. At the same time, the US Treasury needs to continue issuing bonds to finance the massive budget deficit. This is likely to push up US Treasury bond yields further, at least in the medium term, at the latest after the US Federal Reserve’s support programmes come to an end.”
“US Treasuries are likely to remain the asset class of choice for institutional investors for the foreseeable future. They are extremely liquid and offer one of the few safe havens in the bond space. Nevertheless, given the positive outlook and the growing budget deficit of the US Treasury, Microsoft is now a real alternative.”
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