Income And Possible Upside With Microsoft

| About: Microsoft Corporation (MSFT)

Nobody will dispute that Microsoft (NASDAQ:MSFT) stock hasn't exactly been going anywhere in the last decade or so. While some other tech giants such as Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL) have skyrocketed and are touching new highs at the moment, Microsoft has rather lagged behind the competition, despite solid earnings and a massive market share in its operating system division. However, with the recent dividend hike, I believe MS is becoming increasingly attractive as an income generating stock. With the release of Windows 8, it may even have some upside potential.

Some fundamental metrics for the company are as follows: The stock is priced at 15.6x earnings, compared to Google's 21x earnings and the 25.5 industry average. This is historically quite low for the company. The price to book is around 4x, which is reasonable for its industry. The firm's operating margin is very high at around 38% and it maintains a fairly low LT Debt to Equity ratio of about 16.1. The beta of the stock is only 1.01, which should please investors looking to avoid high volatility. All in all, Microsoft seems valued nicely at the moment.

This Tuesday, Microsoft raised its quarterly dividend to 23 cents per share, up from 20, representing a 15% rise. The stock now yields a nice 2.95% yearly dividend. Since 2010, the dividend has shot up from 13 cents to 23, which is a sign of the firm's solid cash position. This should make it an interesting pick for dividend growth investors who are looking to profit from growth in the technology sector. Moreover, the payout ratio of 38% means more dividend hikes could follow.

Microsoft has been doing well in terms of earnings recently, beating the street over 2011 and putting up solid figures in 2012 as well. The firm is also very well capitalized with over 30 billion dollars in liquidity. With the release of Windows 8 just over a month away, the firm has a fair shot at good revenue growth for the rest of the year and going into 2013. However, as hegemonic as Microsoft is in the PC operating system space, it has proven itself to be badly equipped for expansion in other markets, where Google and Apple now reign supreme.

Microsoft has consistently failed to exploit new developments in the internet and smartphone arenas. Its search division is still losing money, but entertainment finally seems to be turning a bit of a profit in the form of Xbox sales. Stiff competition from mainly Apple and Google continues to put pressure on Microsoft to develop new ways of staying competitive in a rapidly changing technological sector. Microsoft has very little market share in the smartphone OS space, and on the whole continues to generate most of its income from its tried and tested activities. Windows 8 displays more of a commitment to newer markets, and it will be interesting to see how this new OS is received by the public.

All in all, as Microsoft matures, it is becoming increasingly attractive as an income generating stock. The recent dividend hike, combined with the firm's strong financial position, reinforce this view. With the release of Windows 8 Microsoft might also prove a catalyst for earnings growth in the near future. However, it remains to be seen how the company manages to keep up with Google and Apple in terms of market share outside of the PC OS division as it remains heavily reliant on its traditional products, a segment in which it has a near-monopoly.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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