Microsoft: A Dividend Stock Pick for the Next 5 Years

| About: Microsoft Corporation (MSFT)

Microsoft Corporation (NASDAQ:MSFT), incorporated in 1981, is the largest and most famous software company, providing software, hardware products and solutions worldwide. Microsoft develops, manufactures, licenses, and supports a broad range of software products and services for various computing devices. The company also designs and sells hardware products including the amazing X-Box. Microsoft’s operations are categorized into five segments: Windows & Windows Live Division (Windows Division), Microsoft Business Division, Server and Tools, Online Services Division, Entertainment and Devices Division. Microsoft acquired Opalis Software in 2009 and Skype in 2011. The company’s largest competitors are Apple Inc. (AAPL), Google Inc. (GOOG) and Oracle Corporation (ORCL).

INCOME STATEMENT ($ million)

SALES

NET INCOME

EPS

DIVIDENDS

2001

$25,296.00

$7,721.00

$0.69

$0.00

2002

$28,365.00

$5,355.00

$0.48

$0.00

2003

$32,187.00

$7,531.00

$0.69

$0.08

2004

$36,835.00

$8,168.00

$0.75

$0.16

2005

$39,788.00

$12,254.00

$1.12

$0.32

2006

$44,282.00

$12,599.00

$1.20

$0.37

2007

$51,122.00

$14,065.00

$1.42

$0.41

2008

$60,420.00

$17,681.00

$1.87

$0.46

2009

$58,437.00

$14,569.00

$1.62

$0.52

2010

$62,484.00

$18,760.00

$2.10

$0.55



When we look at the graphs, it is obvious that sales are on an increasing trend since 2001. There is only one exception: Between 2008 and 2009 sales decreased from $60.42 billion to $58.44 billion. Net income is generally following the same trend with sales revenue. In 2001, the techno-bubble exploded, causing a sharp reduction in profits. The global financial crises also reduced the profits from $17.7 billion in 2008 to $14.57 billion in 2009. However, the long-term upward trend is obvious. Net profits increased by almost 3-fold in the last decade.

Dividend History: Microsoft has paid regular dividends since 2003. The initial dividend of $0.08 per share in 2003 increased by more than 6-fold in 2010. Microsoft has a gigantic amount of cash on its balance sheet, which means the dividends will continue to grow in the future. The last dividend quarterly payment of $0.16 implies a current yield of 2.59%.

BALANCE SHEET ($ million)

CURRENT ASSETS

CURRENT LIABILITIES

LONG TERM DEBT

2001

$58,830.00

$11,541.00

$0.00

2002

$67,646.00

$15,466.00

$0.00

2003

$81,732.00

$16,820.00

$0.00

2004

$94,368.00

$19,543.00

$0.00

2005

$70,815.00

$22,700.00

$0.00

2006

$69,597.00

$29,493.00

$0.00

2007

$63,171.00

$32,074.00

$0.00

2008

$72,793.00

$36,507.00

$0.00

2009

$77,888.00

$38,330.00

$3,746.00

2010

$86,113.00

$39,938.00

$4,939.00



Microsoft’s current assets increased from $58.83 billion in 2001, to $86.11 billion in 2010. In 2004, current assets reached the highest value of $94.37 billion. The current assets show a fluctuating trend. However, when we look at the current liabilities, they follow an increasing trend for the last ten years. Microsoft did not have any long term debt until 2008. In 2009 and 2010, the amount of long term debt on company’s balance sheet was $3.75 billion and $4.94 billion, respectively.

HISTORICAL FUNDAMENTALS

AVG P/E

PROFIT MARGIN (%)

2001

45.9

30.5%

2002

62.6

18.9%

2003

36.5

23.4%

2004

35.7

22.2%

2005

23.6

30.8%

2006

21.7

28.5%

2007

19.9

27.5%

2008

16.3

29.3%

2009

13.4

24.9%

2010

13.1

30.0%

Average P/E ratio was the highest in 2002 with 62.6. However, as the techno-bubble exploded, there is a declining trend in average P/E ratio. Between 2002 -2010, average P/E ratio decreased from 62.6 to 13.1. Profit margins follow a fluctuating trend between 18.9% and 30%. The average profit margin has been around 25% in the last decade.

DIRECT COMPETITOR COMPARISON (from Yahoo Finance)

MSFT

AAPL

GOOG

ORCL

Market Cap

211.07B

314.88B

170.58B

178.08B

Employees

89,000

46,600

26,316

107,870

Qtrly Rev Growth (yoy)

13.30%

82.70%

26.60%

36.90%

Revenue (ttm)

68.62B

87.45B

31.12B

34.35B

Gross Margin (ttm)

78.08%

39.07%

64.97%

75.34%

EBITDA (ttm)

30.14B

26.73B

12.16B

13.63B

Operating Margin (ttm)

39.23%

29.02%

34.35%

31.94%

Net Income (ttm)

21.79B

19.55B

8.85B

7.70B

EPS (ttm)

2.52

20.99

27.28

1.51

P/E (ttm)

9.93

16.23

19.41

23.30

PEG (5 yr expected)

0.92

0.79

1.01

1.64

P/S (ttm)

3.08

3.60

5.48

5.18

Microsoft’s gross margin of 78.08% is higher than its competitors. Apple, Google and Oracle have gross margins of 39.07%, 64.97%, and 75.34%, respectively. Similarly, operating margin of MSFT is the highest compared to competitors. When we look through the PEG ratios, MSFT’s PEG ratio of 0.92 is higher than Apple’s PEG ratio of 0.79, but lower than PEG ratio of Google [1.01] and Oracle [1.64].

Summary

The fundamental analysis above shows that Microsoft is a highly profitable company whose shares are trading way below the historical P/E ratios. The current P/E ratio is 9.81, whereas the forward P/E ratio falls to 8.92. Microsoft’s quarterly earnings were able to beat the analyst estimates, but market response was negative. During the last 10 years profits have gone higher and higher but the stock is still trading almost 60% lower than its peak level. Surely, the valuations at that time were crazy. However, it is time to forgive Microsoft for its past sins. The company’s current yield of 2.59% is surely sustainable. That is why it should be considered among the dividend stock picks for the next 5 years.

Disclosure: I am long MSFT.

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