The market continues to grind higher on its way up to exceed its 2007 highs on the S&P. The market is feeling more and more overbought here given the negative growth expected out of Europe this year, tepid economic growth domestically and a still acrimonious political environment. One stock that I think is ideally positioned here is Microsoft (NASDAQ:MSFT). If the rally continues it will need to spread out to sectors and equities that have not participated fully in the rally over the last three months. On the other hand, a decline should impact high yielding blue chip equities on a lesser basis than the overall market.
In addition, Microsoft is cheap on a valuation basis. The shares sell for under 9x forward earnings and you also get that 3.3% dividend yield. The company has also more than doubled its dividend payout over the past five years, a trend I expect to continue. Finally, the company has a higher credit rating (AAA) than the Federal Government and it holds approximately 25% of its market capitalization in net cash and short term market securities.
Technically, the shares seemed to have bottomed recently, less than 5% below the current stock price (See Chart).
On the product front, I think Microsoft 365 will gain traction and provides a lot of nice features to consumers. The company is aggressively marketing this cloud version of Office, which is the biggest contributor to Microsoft's profits. This version of Office has a lot of important benefits to Microsoft. (A) It provides a great recurring profit stream as customers pay a $100 or $150 annual subscription, (B) it could lessen the impact of declining PC sales and (C) its important effort to lessen piracy in the developing world (Ex, approximately 90% of the software operating in China is pirated). It also is making slow but sure progress with growing its smartphone OS share. Finally, Microsoft's Xbox is also slowly morphing into a home entertainment portal, another reason for hope for shareholders.
- Both companies were former highflyers whose stocks had done basically nothing for a decade.
- Both stocks had gone from growth stocks to value stocks where dividend growth was starting to be as important as revenue growth.
- Both had CEOs that seemed to have vastly overstayed their welcomes.
- Each of these blue chip competitors were facing increasing competition from younger, more nimble competitors.
- Both stocks were selling at dirt cheap valuations.
Since then, Cisco stock is up some 45%, not including dividends. A performance Microsoft's shareholders would be overjoyed to experience over the next 18-24 months.
Disclosure: I am long CSCO, MSFT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.