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?