Last week, I discussed why I bought Intel (INTC) and I also mentioned it in my high increase dividend stocks for Q3. There was another interesting techno stock in this article and it was Microsoft (MSFT). Similar to INTC, MSFT hasn’t provided much to its shareholders in terms of appreciation over the past 10 years (-6.08% for MSFT vs + 1.82% for INTC:
However, since MSFT started paying its dividend in 2003, it has been consistently increasing it while maintaining a low payout ratio (below 30% most of the time). Since the stock is trading at a P/E ratio below 10 (9.87), I think it’s worth that we have a look.
MSFT Company Description:
Microsoft is way more than Windows and Office. It is true that software and business contracts are responsible of 58% of their revenues but MSFT has other cards in its hand. Server & Tools along with entertainment departments are still a big part of their revenues. The main power of MSFT lies in its numerous contracts and licensing agreement that ensures the company will sit on a pile of cash for several years to come. This is why investors are expecting the company to pay a part back through dividends.
MSFT Stock Metrics:
|Current Dividend Yield||3,01|
|5 year Dividend Growth||12,83|
|1 year Dividend Growth||23,08|
|Sales Growth (1 year)||11,94|
|Sales Growth (5 year)||9,03|
|Return on Equity||44,84|
|Debt to Capital Ratio||0,05|
MSFT Technical Analysis Graph:
Upcoming opportunities and dangers:
The main strengths of Microsoft are their cash assets and its diversification. They have left their main cash cows to grow over more sectors. With their partnership with Facebook, they also have an additional Ace in their hand. The future success of MSFT will lie in their ability to use their cash cows to produce better products and services in other niches. They can always count on a new version of Windows or Office to pump up their revenues but this might not always work over the long run. This is why they need to invest wisely.
However, the problem when you have too much cash in your hands is that you can be tempted to jump into any adventure with good and bad results. In the past 10 years, Microsoft had jumped into several products and services… with less than stellar results;
– Bing (do you really want to pit Bing vs Google?)
– Zune (do you even know what this is? 😉 )
– Xbox (it was costly but it took some serious market share from Sony and Nintendo)
– Internet Explorer (which is being eaten like a zebra by Google Chrome and Firefox lions)
– Windows Phone 7
The problem is that MSFT is facing behemoths as competitors each time they try to gain market share in another area. So far, they face off against Google, Rim, Apple, Sony, Nintendo and Oracle just to name a few. As compared to Intel, Microsoft’s competitors are definitely big guys with really big guns (nothing compared to AMD!)
Final Thoughts on MSFT:
With the current valuation of the stock and its continuously increasing dividend, I think that it’s a great pick. But because MSFT’s opponents are heavyweights, I’ve decided to pick Intel instead to add a techno stock to my portfolio. If I had more money, I would probably increase my shares of Intel before looking at Microsoft.
What do you think? Do you think that Microsoft can head back into “growth mode” like Apple did with their iProducts?
When I think of Intel, I see an exciting future, when I think of MSFT, I see a sad, declining future.
Other than the XBox, MS hasn’t done well in any new technology recently.
It is true that IE is getting beaten today, but it is incorrect to say that MS launched it in the past 10 years. IE ripped Netscape to shreds in the 90’s and then development completely stopped because there was no competition left. Good thing Mozilla, Google and Apple are putting up a good fight nowadays.
Tech stocks are tough, over the years we have seen mighty companies come and go. These days Microsoft seems to be suffering from their maturity, it’s a catch 22 for a tech company to be ‘mature’ isn’t it. Stockholders want that maturity and those profits to be given back to them (dividends) but the tech market just has a way of staying young and new and fresh. Maturity means size and age as well, capital and corporate structure have real inertia in business, the more capital and structure you have going the harder it is to change direction and do new things in a hurry. I always have a lot to learn, thanks for a good article and making me think about it.
Doesn’t intel have a lot of issues with the increasing use tablet devices (iPad, Fire, etc.)?
These devices are not using intel chips or are they?
Dividends For The Long Run
MSFT has an image problem when pitted against Apple: it looks like its always second: second to arrive, second best in quality. The dividend has potential but the stock price itself is going to be lackluster until MSFT comes up with something new and groundbreaking…like Apple does every few years.
@Moneycone, It’s even worse when you think that the Xbox is definitely not the most lucrative project MSFT has launched!
@Max, you are right, IE has been there for a lot longer… sorry for that!
@Doug, nice to see you around 😉
@Awake, you are right, this is the major issue for Intel. However, I don’t think that we will switch from computer to tablet at work and this is probably their best source of income. However, if INTC is not able to get in the tablet industry, they will have a hard time finding growth over time!
@Dividends for the long run,
MSFT is facing too many behemoths at the same time and this is why I think they will have a hard time succeeding in the future!
I though XBOX was a pretty good investment for MSFT. They have a pretty big market share there. I have a zune, got it on sale for a steep discount over an ipod. 🙂
I agree that INTC is the better pick in this space, and so far INTC is my only tech investment. I like INTC long-term, but they do have to become competitive and get into the tablet/mobile space. The nice thing is they have a lock on the server market….the servers that all these tables and mobile devices communicate with.
I should have been more clear, it is a profitable division now but it was an investing hole for several years. The first version of the Xbox got a lot of market shares but it was losing money. I wanted to highlight that it hasn’t been an instant success such as windows or office.
I also think Intel is a better company right now. I think MSFT will have difficulty in maintaining their earning in 2012. A stock that I think is better than INTC and MSFT is IBM. IBM will continue to do well next year.