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Monday, August 5, 2013

Recent Buy: MSFT

Aug 5, 2013: Bought 80 shares of MSFT at $31.76 per share.

Founded in 1975 and based in Redmond, Washington, Microsoft Corp. (MSFT) develops, licenses and supports a wide range of products and services related to computing. MSFT's products include operating systems, server applications, productivity applications and business solutions, desktop and server management tools, software development tools, video games, and online advertising. The company also designs and sells hardware, including gaming consoles and PC hardware products.

With its 10-year streak of dividend increases, MSFT recently became a Dividend Contender. It pays quarterly dividends of $0.23 per share in March, June, September and December. Starting Yield on Cost is 2.9%.

Fair value estimates for MSFT vary from $23.48 (Graham Number method) to $35.00 (MorningStar) to $40.70 (S&P Capital IQ). My purchase price is discounted by about 10% to the median of these estimates ($35.00), as required by my stock selection criteria.

The following table provides some key statistics for MSFT.
The sum of MSFT's dividend yield and its 5-yr dividend growth rate is 18.05%, well above the 12% required by the Chowder Dividend Rule. Additionally, MSFT passes the following of my selection criteria:
  • Dividend Payout ratio is below 65% (EPS Payout ratio is 35.52%; FCF Payout ratio is 44.77%)
  • Debt to Equity ratio is 20% (below 50%)
  • 7-year weighted average dividend growth rate is 16.11% (at least 7%)
  • Forward P/E ratio is 10.51 and the trailing twelve month (TTM) P/E ratio is 12.31 (below 16%)
  • 5-yr total payback percentage is 17.16% (at least 16%)

MSFT passes all of my selection criteria and earns 7 stars: (*******)

Other ratings for MSFT

 MorningStar Rating  (*****)
 The Motley Fool 's CAPS Rating  (*****)
 S&P Capital IQ 's Stock Report (*****)Hold
 Thomson Reuters StockReport+ (6/10)Neutral 

Concluding Remarks

MSFT topped my August dashboard of dividend growth candidates. After a disappointing earnings release, the company's stock price fell by more than 10%. MSFT is now trading at a Price/Earnings ratio of just 12.31, despite the fact that revenue, operating income and earnings per share increased over the previous year.

MSFT dominates the PC software market with an enormous market share of about 90% worldwide. It consistently earns phenominal profits (around 25% after taxes) and generates enormous amounts of free cash flow ($27B in the last 12 months). Also, MSFT's balance sheet is so strong that it could afford to pay off its debt five times over.

MSFT's dividend has grown by more than 10% annually since it was initiated in 2003. Currently at 2.9%, Yield on Cost can easily grow to over 20% in 20 years if the current dividend growth rate is maintained.

Not everything is rosy, of course, and MSFT is experiencing challenging times adjusting to the decline of PC sales in favor of tablet and other computing platforms. The company's attempts to compete in these markets have produced lackluster results. Given the size of the company's market share in the corporate world (including enterprise products and solutions), I think the problems related to a declining PC market may be overstated.

One drawback to purchasing shares in MSFT is that it overloads DivGro on Technology stocks. I'm similarly overloaded on stocks in the Basic Materials sector. I'll continue to seek opportunities to diversify more, but only if I find candidates worthy of purchase...

MSFT is my 13th dividend stock purchase for DivGro. 80 shares of MSFT represents $73.60 of expected annual dividend income. DivGro's forward 12-month projected dividend income is now $1,447.95.

Full Disclosure: Long MSFT


  1. Congratulations on your purchase, Microsoft is a company recognized worldwide and solid. However belongs to the world of technologies, rapidly changing world and not as stable as others, although there is no doubt that Microsoft is one of the giants of today.

    1. Thanks for checking in! Our world is changing rapidly indeed. A few years ago Steve Balmer (CEO of Microsoft) balked at purchasing Google for about $5B. He also poked fun at Apple's iPhone. See how things have changed... Having said that, Microsoft is not Balmer, and Balmer is not Microsoft. He can be asked to go. And if things don't improve drastically for Microsoft, I think he will have to go! I'm not betting on Microsoft (and its stock price) improving, though. I'm betting on Microsoft continuing to pay and raise dividends.

  2. Dude Congrats on the buy before the big news!!! Lucky hahaha

    1. Pure luck on the timing! Funny how just the hope of change (and nothing more) can change the perceived value of a stock. I don't buy it... nothing fundamentally has changed until we see the evidence in earnings reports! Meanwhile, I'll just happily collect my quarterly dividends on this one...


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