Microsoft: What's Next?

Jul.24.14 | About: Microsoft Corporation (MSFT)

Summary

Microsoft had a mixed quarter.

As cloud push continues, consolidation is key.

Dividend raise getting closer.

Microsoft a good buy on the next pullback.

Microsoft's (NASDAQ:MSFT) fiscal Q4 earnings report was a bit mixed. While the company beat on revenues, the bottom line number missed by a nickel. For the first time, results included the acquired Nokia division, which boosted revenues by about $2 billion but pressured EPS by $0.08. Analysts seemed to brush off the miss, with a couple of positive notes out Wednesday morning. The Nokia acquisition is going to impact results for a couple of quarters, making the company's revenue growth look a bit better. I believe it will take another quarter or two for analysts to adjust to this, as you saw how fiscal Q1 guidance fell a bit short of estimates. Analysts were looking for nearly 25% revenue growth, which I thought was a bit unrealistic, and Microsoft has guided a little conservative recently.

Now, it is time for Microsoft to get going. The company will continue to make its push to the cloud. As CEO Satya Nadella stated in the above earnings release, commercial cloud revenue more than doubled again to a $4.4 billion plus annual run rate. Additionally, the company has announced an aggressive plan to streamline operations by cutting up to 18k jobs, which will result in a $1.1 to $1.6 billion pre-tax charge in the current fiscal year. Over time, those concerned with the earnings miss should feel comfort that the company is looking to cut costs, and we figured some Nokia consolidation would occur. Microsoft is still a very profitable business.

The next big item investors should be looking forward to is the potential dividend raise in about two months. In mid to late September, Microsoft will probably announce a raise, and my original prediction was for a raise of 4 cents to $0.32 per quarter. That would be a 14% plus raise, and would give Microsoft shares a 2.85% yield as of Wednesday's close. The company offers a solid dividend and decent buyback, and in total $3.43 billion was returned to shareholders in the quarter.

Microsoft may not be the most exciting investment out there currently, but the company has certainly rewarded investors in recent times. The company is doing the right things, investing in the cloud and cutting its fat. Investors are being rewarded with a strong capital return plan, and the valuation is rather fair. Shares are close to their 52-week high at the moment, so investors should look to buy on the next pullback. Going forward, Microsoft is an intriguing name to watch, and the next big catalyst could be a large dividend raise.

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