Microsoft (MSFT) is thought of by most investors as a boring company that reached its peak years ago. Well, sometimes boring companies make for the best investments. While the glory days of trading Microsoft stock may be over, buy and hold investors can still realize large profits in the stock. Below are three reasons why investors should consider Microsoft for their portfolio.
Reason #1 To Invest - Growth Projections
Analysts are currently expecting earnings to be $2.85 per share in 2013 and $3.15 in 2014. In percentage terms, these numbers come out to about a 4% growth rate in 2013 and just under 11% for 2014. While the 2013 rate isn't anything to be excited about, the 2014 number is, which again makes it ideal for buy and hold investors. I also think that these numbers may turn out to be on the safe side for estimates, as consumers may have been holding out to see how Microsoft's new products would rate with other consumers, most notably the Surface Tablet and Windows 8 operating system.
Reason #2 To Invest - Valuation Is A Bargain
Microsoft is currently trading with 8.2% of its 52 week low, as the chart below shows.
While the rest of the market may have been getting ahead of itself, Microsoft appears to have been increasing at a much slower rate. This can be good or bad, but in this case, I'm leaning towards good. I think the lack of enthusiasm here has to do with the first quarter report that came out. The company was unable to meet analyst expectations. Microsoft's EPS were $0.53, 3 cents short of what analysts were counting on. Additionally, the revenues were about $400 million shy of expectations.
One of the reasons why Microsoft may have missed on both numbers was that consumers may have waiting for its new products to come out instead of spending the money on a product that may become ancient rather quickly. The two products that consumers may have been waiting to purchase were the Surface Tablet and the Windows 8 operating system.
From a metrics perspective, Microsoft is also very appealing. Its PE ratio comes in at 15.3, its gross margin is 75%, and its ROE is 23%. Let's look at a few of Microsoft's competitors to see how this ranks. Hewlett-Packard (HPQ) only has gross margins of 23%, and its ROE is a negative 42%. Google (GOOG) has a PE ratio of 24.8, gross margins of 59%, and an ROE of 17%. Again, Microsoft is superior when looking at all of those metrics. Whether Microsoft will move back to where it should be on a valuation perspective remains to be seen, but it's hard to argue that it looks cheap at the moment.
Reason #3 To Invest - Potential Dividend Increase
During September 2012, Microsoft investors were enthused when the company decided to increase its dividend by 15%. This made the dividend payment a quarterly amount of 23 cents per share. Based on today's price, this equates to an annual dividend yield of 3.3%. Although not huge, it does serve as an additional incentive for investors who already think the shares are poised for growth.
The interesting thing about Microsoft's dividend is that the company has been reducing the amount of outstanding shares over the past several years. When a company's shares decrease, the dividend amount usually increases because there is more money being pushed to fewer shares.
Additionally, in 2006, the company's quarterly dividend payment was only 8 cents. Since that point, it has nearly tripled to its current 23 cents per quarter. Although not guaranteed, it makes sense that the company's dividend has room for future growth.
Also, it's important to compare Microsoft's dividend against some of its competitors. Investors will realize that Microsoft is vastly superior in this regard. Some of Microsoft's largest rivals are Oracle (ORCL), International Business Machines (IBM), Google, and Hewlett-Packard. Here are their respective dividend yields:
Now, while the dividend yields aren't everything, they are typically an important factor for buy and hold investors, especially those looking at several years down the road. And let's not forget that history has shown Microsoft to be an aggressive raiser of the dividend amount, so the yield may only become more attractive in the future.
My biggest concern is lack of innovation. Although historically speaking Microsoft is one of the all-time greats when it comes to innovation, lately, it seems to have been falling off a bit. Some of its latest operating system releases didn't receive the warmest of receptions, and the company hasn't really made a splash into other areas. The Surface Tablet is a great start, and I'm hopeful that this great product will pick up steam as it moves forward. Perhaps this will serve as an impetus for the company to continue looking to diversify into other areas. It certainly has to branch out away from the operating systems space if it wishes to compete with the tech giants of today such as Apple (AAPL), Google, and Amazon.com (AMZN).
Investors looking for a cheap company with a healthy dividend payment and the potential for innovation should strongly consider Microsoft. Although the company certainly hasn't impressed anyone with its recent earnings reports, I do see a lot of room for potential and future growth.