With roughly 10 and a half months in the books, this has been a strong year for Wall Street. The Dow Jones Industrial Average, in particular, has had a solid 2014. In fact, only a handful of selections within the Dow are down for the year, and of those that are in the red, International Business Machines (IBM – Free IBM Stock Report) is the sole representative, down more than 10% year to date. Conversely, the largest gainer thus far this year is Microsoft Corp. (MSFT – Free Microsoft Stock Report). The world’s largest independent software maker does not get the number of headlines that it did in the past, but its stock performance has done most of the talking through mid-November. In fact, a quick glance at the page’s Price Chart, or Graph, shows that after the most recent run-up, this equity is trading at a 52-week high and is up a hair more than 30% thus far in 2014. For sure, many technology investors have cycled into sexier names like Apple Inc. (AAPL) and Google Inc. (GOOG), arguably the two most talked about players in the current market. Truth be told, one can gather from the Timeliness Rank of 4 (Below Average) that we are not recommending MSFT for near-term investors at this time, although that does not mean that a bevy of accounts can’t benefit from including this stock. The company boasts a number of favorable traits and those familiar with Value Line’s layout should see these characteristics jumping out at them.
Before we look at what some investors may like about Microsoft, a brief history seems like a good idea. The genesis of the company dates back to April of 1975, when Bill Gates and Paul Allen founded Microsoft. Then in 1980, Steve Ballmer came into the fold, and a deal was struck with IBM to bundle Microsoft operating systems into IBM computers. By the 1990s, Windows was the dominant operating platform and Microsoft goods were featured in 90% of the world’s personal computers.
Mr. Gates and Mr. Ballmer had been the only two CEOs in the company’s history until February 2014, when Satya Nadella stepped in, as shown in the Blurb (Business Descriptiion) segment of our page. (Sports fans will recognize Mr. Ballmer’s name as the gentleman who recently purchased the Los Angeles Clippers for a record $2 billion. Coincidentally, Mr. Allen is also active in the ownership of sports franchises; his Seattle Seahawks are the defending Super Bowl champions.) Also, from that section, one can decipher that the company has evolved considerably through the years. Devices and consumer revenues made up 43% of the revenue pie in fiscal 2014 (years end June 30th), while 57% was generated in the commercial environment. Two high profile offerings that most are familiar with would be its Bing search engine and Xbox game console.
Most recently, MSFT kicked off fiscal 2015 in fine fashion. The Commentary piece on our page goes into greater depth on this subject, however, we will touch on the successes in the consumer market. The Xbox as well as the peripherals that go along with it (games, various controllers, accessories etc.) have all seen increases in demand. Perhaps more impressing is that the Surface Pro 3, a newer version of its tablet offering, has shown decent penetration in a market dominated by Apple’s iPad. Smaller competitors have basically given up going head to head with Apple, but Microsoft still has the clout to go directly at that tech behemoth. With that, much of what goes into this stature is what we like about the company from a long-term investment standpoint.
Staying on the left side of the Value Line page, in the middle, are two boxes that need to be perused. The Capital Structure and Current Position boxes provide nuggets of information that can shape an investment thesis. For starters, the company’s market capitalization is $392 billion as of our most recent reading. The size and scope of its operations give MSFT a leg up on much of its competitors. Also, for such a huge corporation, its debt burden is extremely manageable at just 17% of capital. Furthermore, it closed out fiscal 2014 with nearly $90 billion in cash on its books. This kind of treasure chest opens up a lot of doors and gives Microsoft superior flexibility to make moves that some peers could never undertake. A much larger number of potential acquisitions is on the table, other levers (say share repurchases) can be pushed to support the stock, and, vital in our view, the dividend is fully supported. In that vein, MSFT is not what we would consider aggressive on the acquisition front. Deals to acquire Skype Communications for $8.5 billion in 2011 and purchasing Nokia’s smartphone/cellular operations for $7.2 billion last year come to mind. Too, buybacks probably will not be overly emphasized with the shares trading at currently lofty levels. So, returning more cash to shareholders via the dividend may well be in the cards.
In building a case to include MSFT in an investment portfolio, our first piece of evidence would be the stock’s dividend payout. As of the date on our page, MSFT stock was yielding 2.6%, which is comfortably ahead of the Value Line median. That metric has jockeyed between 2.0% and 2.2% for much of 2014. Too, our projections have the payout reaching the 3.0% plateau for the stretch to 2017-2019. Clearly, we do not view cash generation as an issue over that pull. Financials are exemplary, as noted by our A++ grade for Financial Strength and Safety of 1 (Highest). These designations can be found in our Financial Strength box in the lower rand hand corner and in our Ranks Box under the Timeliness rank, respectively.
As stated, we think the stock is trading at an unfavorable price present day, but the fundamentals in place are top notch. MSFT is undoubtedly on solid footing. This can be gleaned from the Statistical Array and Quarterly boxes on the left, which show a general uptrend in the company’s top and bottom lines. Just below, the Annual Rates box paints a pretty picture regarding growth rates that have been strong for some time and show no signs of tapering off.