Mission Accomplished On Apple - Is Microsoft Now The Next Activist Target?

| About: Microsoft Corporation (MSFT)
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Apple (NASDAQ:AAPL) shares have shot up some 30% from their late-June lows over the last eight weeks. Contrary to many prognosticators' opinions, this rally was not triggered by a new product line like the much-speculated about iTV or iWatch. Nor was it powered by a iPhone with a bigger screen or a major distribution deal with a telecom giant like China Mobile (NYSE:CHL). This rise was driven by some financial moves the company made to reward their shareholders, which included a 15% dividend hike and a $60 billion stock repurchase program.

These financial moves did not come entirely organically from the company itself. They were agitated for by activist manager David Einhorn, who took a significant stake in Apple earlier in the year and has been a positive catalyst for these changes since. In addition, Carl Icahn recently took a $1.5 billion stake in the shares and is already agitating for more shareholder friendly moves for Apple's more than $100 billion cash balance.

I believe a good portion of Apple's run is over for the moment, and the stock will probably consolidate around these levels. I still hold the shares, however, as I think the company will have several successful product launches later in the year. I'm now looking at the next major tech company activists will target to unlock some Apple-like financial magic. I think that company might end up being Microsoft (NASDAQ:MSFT). This thesis gained some currency this morning when Rick Sherlund, a noted analyst "axe" on Microsoft at Nomura, upped the shares to a "Buy" with a $38 a share price target. He noted increasing activism specifically from ValueAct, which is seeking a seat on the Microsoft board as a key reason for the upgrade on the shares.

Given the company's stable corporate revenue base and substantial cash flow, the company could easily afford to hike its dividend substantially, which already provides a yield of 2.9%. It should be noted that based on recent history, another dividend hike should be announced by the end of the year regardless. The last dividend hike occurred in November 2012, and the company has raised dividend payouts on an annual basis in recent years. Another way the company could unlock shareholder value is by using its over $70 billion cash and marketable securities hoard to substantially raise its stock repurchase program. It needs little of this cash to run its day-to-day business, and a large acquisition would more than likely be a destroyer of shareholder value like most large acquisitions or mergers.

I believe ValueAct will not be the last activist to target Microsoft given its stable cash flow and large cash position. It's a stock that has basically moved very little over the past decade, even as earnings and operating cash flow have more than tripled in that time frame. I have recently upped my stake in Microsoft as I believe increasing activism could unlock significant shareholder value. The stock also provides a good value while waiting for this possible catalyst. The shares should yield more than 3% after the next dividend hike is announced by the end of the year. The stock is also selling near the bottom of its five-year valuation range based on P/E, P/S, P/CF, and P/B.

The company's new Xbox console will be launched in November, in time for the holiday season, and should be a big success. The company also has two cloud services (Microsoft 365 and Azure web services) that are running at better than a $1 billion annual revenue rate and do not get much attention in the press. Finally, the demise of BlackBerry (BBRY) could help the company firmly established its Window OS as a solid third provider in the mobile space.

Given that I believe the market is currently overbought, I'd say that MSFT offers value investors a good entry point as a defensive pick with a solid yield. The possible catalyst of activists starting to target the stock to unlock value is just icing on the cake.

Disclosure: I am long AAPL, MSFT. 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.