10 Good Reasons to Consider Microsoft for Your Portfolio

Jul.14.11 | About: Microsoft Corporation (MSFT)
1. Microsoft (NASDAQ: MSFT) is the most widely held stock among the value oriented ’super investors’ tracked by dataroma.com: 24 out of 49 had it in their portfolio last time they disclosed their positions. It was also the most added stock during the first quarter of 2011 among the tracked investors.
2. The market values Microsoft to be worth 224,6 billion USD. This translates to forward P/E of just 9.6 and Price per free cash flow 11.6. For every share worth $26,63, Microsoft has $5.95 of cash. It gives great return on equity at 44.0% and is highly profitable (Profit Margin 31.8%). It is no wonder that value oriented investors are flocking to Microsoft.
3. Microsoft requires little capital investment. In an inflationary environment, it won’t have the problem of replacing assets at much higher prices. On the other hand, as it is low on debt (Debt/Equity 0.22), it won’t suffer from increasing real interest rates in a deflationary environment either.
4. It’s out of favor – even hated by many. Hot stocks in hot industries are carrying a hefty price premium that may vanish. Stocks that are out of favor are more attractive to value investors – especially when the company is making lots of money and has growing product segments to offset declining ones.
5. Launch of Win7 phones by Nokia (NYSE: NOK) may be a significant catalyst for the stock. Unlike Windows and Office releases (including Office 365), which at best help Microsoft defend its huge market share in those markets, Win7 is likely getting much more market share in the mobile space via Nokia than it now has.
6. Besides getting revenues from Win7 mobile devices, Microsoft may also get significant royalty stream from mobile devices using Google’s (NASDAQ: GOOG) Android operating system. Microsoft is going after mobile device manufacturers using Android, and claims to have patents on some of the technologies used in certain Android features. It has already settled the case with several companies, including HTC (OTC:HTCCF), and has recently demanded Samsung (OTC:SSNLF) to pay $15 for each Android phone it ships.
7. Microsoft has considerable moat (competitive advantage). Coca-cola (NYSE:KO) has been attacked for years by cheaper and similar, or even better tasting products. Still, it is around with a considerable market share. Similarly, everybody knows Microsoft, and people are accustomed to using Microsoft products – Office and Windows. A typical worker does not want any changes to what they have become used to. I have seen plenty of highly educated people cursing even the slightest of changes in the software they utilize every day. The alternatives to Office and Windows may slowly eat away some of the market share and profits from Microsoft, but I don’t think this will happen in the scale baked in the current valuation of the company.
8. Personal computing over wired networks won’t die easily. The growth of data traffic in cellular networks has been phenomenal in recent years. Data traffic started to grow after cellular modems attached to laptops became popular, and flat data pricing schemes were taken into use. Later smartphones and tablets accelerated the growth even further. However, unlike PCs and laptops connected to fixed line broadband networks (e.g. via ADSL with wireless access point), mobile devices in a cellular network share a limited amount of bandwidth available at each location via single or multiple cells.
If you add enough bandwidth hungry devices to a single radio cell (using any technology), you are left with insufficient amount of bandwidth per device. There are many ways in which current networks can be improved (making cell size smaller etc.), but ultimately there is a limit to what cellular networks can do with a reasonable amount of money invested into them (read: reasonable amount of money that you have to pay for the connectivity). Therefore, a bulk of internet traffic will continue to be transmitted via fixed networks [you can read more about this important subject from Mobile Opportunity blog by Michael Mace].
9. Microsoft started dividend payments in 2003 and has been growing steadily the quarterly dividend – now at 16 cents. Even though the yield is not that great (about 2.4%) there is plenty of room to grow it given that Microsoft now distributes less than one third of earnings as dividend to shareholders (16c vs. FY11 Q3 diluted EPS of 61c).

10. If U.S.-based corporations get the one-time tax holiday that has been discussed for some time now, Microsoft is one of the biggest beneficiaries. Microsoft could save $8.8 billion on the $29.5 billion it has "permanently reinvested" overseas, as reported by San Francisco Chronicle. Microsoft could return part of this excess cash to shareholders.
Disclosure: I am long MSFT, NOK.