Microsoft’s (MSFT) stock has gone nowhere for over a decade, trading in the $40-$60 range through 1999 and early 2000, and only occasionally breaking $30 since. Currently trading around $26-$27 ($27.12 on September 16 market close), it’s threatening to pierce $30 again. Several factors support the argument that Microsoft’s stock can achieve sustained value above $30 in the coming year.
Some context can help here. CEO Steve Ballmer has headed the company since January 2000. Stepping into the founder’s shoes is never easy, and no one can blame Ballmer for failing to continue Microsoft’s meteoric growth from a start up to a multinational powerhouse – a company can only grow so big. But at some point blame for failure to generate value for shareholders is placed on the person at the helm, and that’s Ballmer. Consequently, grumbling about Ballmer has been on the rise, with highly respected fund manager David Einhorn saying it’s time for Ballmer to leave and that he’s a drag on the stock (see, e.g., here.).
Setting Microsoft’s anemic stock performance and the sky-high expectations for big tech companies aside, Microsoft’s financial performance since Ballmer took over hasn’t exactly been a disaster. Since 2002, earnings have only gone down twice, in 2004 and (not surprisingly) 2009, and in both 2005 and 2010 they rebounded above the level of the year preceding the declining year.
Consequently, the stock’s P/E level has steadily fallen, ranging from 29-50 in 2002, and now standing at 10. At some point this has to stop, with the company either stumbling on growth trends long sustained under Ballmer’s leadership, or the stock going up.
Microsoft has also transitioned to offering a hearty dividend compared to big tech peers, now yielding 2.36% versus 2.04% for Hewlett-Packard (HPQ), 1.73% for IBM (IBM), 1.44% for Cisco (CSCO), and no dividends for Apple (AAPL). And the company’s regular dividends have steadily increased since they began in 2003, multiplying from .08 to .61 a share, pointing to a slow but steady momentum that at some point should boost its shares.
Now on top of these long-term trends are early reports that the upcoming Windows 8 package looks strong, with the newly released developer version drawing hype that Microsoft is leveraging rather than suffering from the tablet explosion Apple’s iPad ignited (see, e.g., here and here.). While parsing through these articles to predict the success or failure of a particular high-tech product is precarious, one significant reflection of industry expectations is a recent post on Adobe System’s (ADBE) web page stating (in the context of expecting continued support for its Flash multimedia platform): “We expect Windows desktop to be extremely popular for years to come (including Windows 8 desktop) ...”
Finally, Microsoft’s shares have been particularly resilient this year while the Japanese earthquake, continuing U.S. budget deficit and unemployment, and fears of a double dip recession shook the equities’ markets, suggesting broad sentiment that Microsoft’s shares are a value. The Dow Jones Industrial average has fallen 11.2% from its 52 week high on May 2 (12,876) as of market close on September 16 (11,433.71). Microsoft is a Dow component, and its shares rose 7.1% (from $25.32 to $27.12) over the same period, falling only 7.9% from its Microsoft’s own 52-week peak on January 27 ($29.46), without factoring in dividends.
So if long-term trends continue, Microsoft at current price levels offers increased resilience to correction, good dividend income, and the real prospect of capital appreciation if Windows 8 is a solid base hit.
Disclaimer: The information provided in this post does not constitute professional investment advice, and should only be used in consonance with all available information, including the opinion of a professional adviser, to make an investment decision.