Microsoft: Why $38 Looks Enticing

| About: Microsoft Corporation (MSFT)

Summary

Is the new CEO really turning the tide as Office for iPad has shown?

A rare inside purchase and price targets add to the positives.

Charts show the stock having solid support at the 3% to 3.2% yield mark.

After reaching a 52-week high of $41.66 on April 2nd, Microsoft Corporation (NASDAQ:MSFT) is now taking a little breather as the stock is down to close to 5% at $39.83. With the market still a bit wobbly, it may not take long for the stock to lose another 5% to 6%.

This would put the stock around $37 to $38. While we were a bit skeptical when the stock soared to almost $42 after the new CEO took over, a much needed pullback and few other recent positives have us interested. This article presents a few reasons why Microsoft at $37 to $38 would appear enticing. Let us get into the details.

3% Yield: $37.33 would represent a 3% yield based on the current dividend per share of $1.12. However, if you have been tracking Microsoft's dividend growth you will be aware that a dividend increase will be announced in September and that the dividend growth rate will at least be about 10%. This should put the new dividend/share at $1.23. That would put Microsoft's yield at its highest level in the past five years, at about 3.3% if the share price drops to $38.

Price Targets:

  • Morningstar has a fair value estimate of $42, which represents a 10% upside from $38.
  • 14 analysts on Yahoo Finance and 36 analysts on Marketwatch.com have almost the same price target.
  • Buying at $38 would give investors a fair margin of safety based on these price targets as well as Microsoft's 3% yield.

Insider Purchase:

  • Insider purchases have always been sparse in recent times, especially in tech companies. Microsoft recently had couple of massive insider transactions (from the same person who was recently selected for the board) as shown below.
  • This is particularly important as this marks the first insider purchase in Microsoft since June 2012.
  • $38 is obviously a better entry point for investors than what this insider had.

Click to enlarge (Source: Yahoo Finance)

Technical Reason: The chart below goes hand in hand with the point mentioned above that Microsoft's highest yield over the past five years has been about 3%. The stock has bounced multiple times off the 3% yield point over the past five years. For example, when the annual dividend per share was 80 cents in 2012, the stock's support was around $26.70 as highlighted below. The point is, the current 3% yield level of $37.33 will likely have the same support.

And as mentioned in the first section above, Microsoft's strong dividend growth will likely increase the floor price of the stock accordingly.

Click to enlarge

(Source: Yahoo Finance)

Lastly, (not related to the $38 share price) Microsoft's Office for iPad has made a roaring start, reaching 27 million downloads in 5 weeks. In spite of some recent weakness in iPad sales, this could be a big revenue driver going forward for Microsoft. As Trefis.com shows, the Office division makes up almost 40% of the stock price.

Conclusion: The stock is not yet ripe for the picking but the time could be near. With just one more quarter to go before the dividend increase is announced, dividend growth investors will need to watch for pullbacks to lock in a higher yield of cost. Are you a believer in Satya Nadella's Microsoft?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article was written by Tradevestor's analyst. Tradevestor is not receiving compensation for it (other than from Seeking Alpha). Tradevestor has no business relationship with any company whose stock is mentioned in this article.