A Microsoft And Intel Synergistic Portfolio

| About: Intel Corporation (INTC)

Microsoft (NASDAQ:MSFT) & Intel (NASDAQ:INTC) Equity/Debt Synergy

"Synergy is two or more things functioning together to produce a result not independently obtainable."

The lure of the stock market is the possibility a sum of money will be multiplied greatly, by picking the right company's equity. The problem is a couple good picks and a few that do not perform well, either lose money or break even. By adding some bonds, and some treasuries, your portfolio has the potential to become more stable and customized for the future.

I will never ever forget legendary financial commentator and 'Squawk Box' host the late Mark Haines reply to his co-host speaking about a penny stock. He adjusted his tie and shook his head and proclaimed 'we don't do penny stocks.'

Wise advice, however I'd take that one step further and gravitate away from companies that have low credit ratings. If investors checked the credit rating on the companies in their portfolio they might be in for a surprise. The fact is any stock could become a dollar or penny stock; if it is run into the ground - this is why strategy demands that a balanced portfolio be diversified.

Microsoft and Intel's stocks are the near antithesis of Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) stock. For this reason I recommend a little exposure to each of them, however in the near term Apple and Google can experience great price swings, and Apple has no bonds, while Google has a couple that are very near term and low yielding.

I recommend underweighting Apple and Google, and focus on a balanced position in Microsoft and Intel; test the water first, watch the market and consider building positions over the years. Also underweight the equity and choose a balanced amount of intermediate or long term Microsoft and Intel bonds. Because there are some better non Microsoft or Intel near term bonds; however over the long term exposure to Microsoft and Intel gives a portfolio the capacity (not certainty) to synergistically increase value; as Microsoft and Intel focus on the future of technology.

Mergers & Acquisitions

Microsoft and Intel do not wait for innovation to knock on their door, they are out there speculating and negotiating. As was the case when Microsoft tried to buy Yahoo! (NASDAQ:YHOO), for over $44B in 2008.

In 2011 Microsoft's acquired Skype for over $8B from Silver Lake just four years after Ebay (NASDAQ:EBAY) sold it. Microsoft saw great value in the Skype application. However what is most important is the fact that Microsoft does not just rely on one specialized service; the company works to diversify.

On the other hand Intel made its largest aquisition ever in 2010 of McAfee, for $7.7B.

"Together the two companies will work to help people more securely take full advantage of the potential of computing and connectivity."

Balance Equity and Debt

Moody's rates Intel bonds A1 and Microsoft is rated AAA.

A balanced portfolio of cash, mutual funds, stocks and bonds could hold 3 - 4.5% of assets in Microsoft and Intel equity and debt. If the investor is high net worth consider limiting the total investment in Microsoft and Intel at an incremental ratio to the total assets.

Total Portfolio Investment in Microsoft and Intel Stocks / Bonds Percentage of Total Portfolio
$500,000 $20,000 4%
$1,000,000 $35,000 3.5%
$3,000,000 $55,000 1.8%
$6,000,000 $75,000 1.25%
$10,000,000 $125,000 1.25%

(Note larger portfolios often have exposure to one or both of these companies in mutual funds, these are not included in this strategy.)

For investors with a $125,000 portfolio consider two Microsoft bonds, two Intel bonds and the remainder in both companies' stock. For this example I chose a lower yield Microsoft bond that is priced more affordably.:

Security Quantity Price Yield Total
Microsoft 20 29.13 2.7% 583
Intel 20 26.54 3.2% 531

Microsoft October 1, 2040 4.5% (CUSIP 594918AJ3)

2 114.32 3.6% 2,286
Intel October 1, 2041 4.8% (CUSIP 458140AK6) (Continuously Callable) 2 113.03 4% 2,260

This totals $5,660 (plus $32 commissions) and would be 4.53% of a $125,000 portfolio. Even in a worst case scenario this amount should not sink your portfolio.

A Small Portfolio Strategy

For smaller investment portfolios you may need to consider one Microsoft bond (because Microsoft is rated AAA) and Intel stock, to begin with. Then over time use the bond income to accumulate Microsoft stock and attempt to deposit more to buy the Intel bond.

Let's consider a $12,500 investment portfolio, some investors may scoff, however this could be an average saving account for any American from college student onwards. For this type of smaller account consider a 11.7% allocation ($1,462) in Microsoft and Intel equity and debt. This amounts to one Microsoft bond and a dozen shares of Intel.

Intel has a .84 cent a share dividend (3.2%) so in ten years if you set your dividends to reinvest you should make at least $100. In ten years the Microsoft bond will generate $450.

One additional consideration is often bonds are sold in minimum quantities of 2, 5, 10, etc. However if you keep an eye on the market you should find single bond offerings.

Financial Advice vs. Financial Reality

Sometimes I wonder if newer brokers realize the tough realities faced by their clients. A broker told me once you "should always keep enough cash for two years worth of expenses." (Note that often this same broker will take all of your cash and put it into their company's funds.) Because some people can afford to keep years of needed cash and some can not; as a strategic consideration keep 40% in cash or near term US Treasury allocation.

What differentiates strategists from day traders is a focus on saving not betting. These are reasons why Microsoft and Intel are attractive as part of a synergistic portfolio:

  • proven track records
  • stocks and bonds are still well priced
  • companies earn their keep
  • stocks offer attractive dividends
  • the bonds are well rated (though a lower yield)

Microsoft and Intel are engaged in competitive and advanced business. They seem to constantly push for better and better results; such as XBox entertainment features and increasingly fast processing speeds. They supply the businesses that serve consumers and market directly to consumers worldwide.

So for someone who wants to build savings, certainly maintain a cash balance. However consider some long term investments in order to generate income for further into the future. Place funds needed for the near term in a separate account or at a bank; if you have enough for two years or more great, if not it is even more important to save.

Calculated Risk

When considering strategy you should be aware of the market conditions. Had you bought either of these stocks at their peaks you'd be out a lot of money. However if you are a long term investor and use a strategy such as this you are only partly exposed to equity.

So many promising ventures ultimately fail. They may entice investors with dividends however the business simply can not build shareholder value.

Microsoft and Intel are already large companies, they have weathered tough economic times and seem to be capable of self-sufficiency. There is still risk, the stocks can easily fluctuate 10% -- Intel can go under $20 / share, that would be a 30% drop. So be knowledgeable of the risk and consider if it suits your objectives.

If you allocate an amount that you are comfortable with to begin with a couple hundred dollar loss is acceptable. Consider that the market just dropped from 13,360 to 12,111 rapidly; while Wal-Mart (NYSE:WMT) lifted off to a 52 week high, in the same period. The market is not predictable, so your portfolio must accept that; the goal is to generate bond income and use that income to increase your overall yield (ie: use the income to get more stock, or bonds, or income funds.)

If you have additional considerations on this strategy or Microsoft and Intel's equity and debt please comment below. Also if you see a better Microsoft or Intel bond being offered copy the CUSIP -- though I generally prefer non callable bonds Intel only offers certain types of bonds, often they are callable (only recently did Intel for the first time since 1987 offer non convertible bonds.)

Disclosure: I am long MSFT, INTC, AAPL, GOOG, YHOO, CAG, GIS, K, WMT, EBAY.

Additional disclosure: I am long MICROSOFT CORP 4.500% 10/01/40 B/E DTD 09/27/10 N/C