Microsoft Stock Split: When It Might Happen Again And What You Need To Know

Summary

• If history is a harbinger, Microsoft may initiate a stock split soon.
• Studies indicate companies that execute stock splits outperform the markets by wide margins.
• Aside from the possibility of a stock split, there is much that recommends Microsoft as an investment.

Microsoft Corporation (NASDAQ:MSFT) is a growth dynamo.

The company’s software business churns out a reliable revenue stream while the cloud segment grows at a high double-digit pace. In the last quarter, video gaming pulled in record breaking revenue as lesser known divisions experienced torrid growth.

While the yield may not be to the liking of many in the DGI crowd, the dividend has more than quadrupled over the last decade. The company has a fortress financial sheet, and a variety of initiatives should continue to propel the shares higher.

Of course, the robust, sustained growth rates have the share price near 52 week highs. With that in mind, one might wonder if a stock split is just over the horizon. My research revealed it as a strong possibility. It also uncovered extensive studies indicating the shares will likely outperform the market, should management opt for a stock split.

Microsoft Stock Split History

Below is a record of each split with the closing price the day before the split followed by the closing price the day of the split, with the percent gain/loss.

Pre-split Post-split % gain/loss

9/18/87 2 for 1 $114.50 $53.50 -6.6%

4/12/90 2 for 1 $120.75 $60.75 .6%

6/26/91 3 for 2 $100.75 $68.00 1.24%

6/12/92 3 for 2 $112.50 $75.75 1.00%

5/20/94 2 for 1 $97.75 $50.63 3.59%

12/6/96 2 for 1 $152.87 $81.75 6.95%

2/20/98 2 for 1 $155.13 $81.63 5.24%

3/26/99 2 for 1 $178.13 $92.38 3.72%

2/14/03 2 for 1 $48.30 $24.96 3.35%

Source: Microsoft Investor Relations

Adjusted for inflation, the average price at split was $214.70. Discarding the anomalous 2003 split, the average price was $232.96. The highest inflation adjusted price was in 1999 at $279.66, the lowest (excluding 2003) was 1994 at $173.01.

With Microsoft currently trading at $226.73, that places today’s price at the median of the inflation adjusted prices.

What Would A Stock Split Mean For Investors?

A 2012 Columbia University study determined that in the three days surrounding a stock split, shares outperform by a positive 1.6%.

The average gain is somewhat muted for dividend stocks; however, stock splits accurately predict an increase in future dividends.

Citing other studies, the research concluded that companies initiating stock splits experienced reduced earnings growth. Nonetheless, for two years following the split, future earnings growth of the splitting firms is greater than that of matched companies with similar past earnings growth histories.

Although stock splits seem to be purely cosmetic, there is ample empirical evidence that they are associated with abnormal returns.

Summary of 2005 study by Oliver Rui, Steven Wang and Tak Yan Leung

The good news for investors does not end in the weeks surrounding a stock split.

A 1996 Rice University study of every company involved in a 2 for 1 stock split between 1975 and 1990 determined companies executing stock splits had average returns 8% above the market one year after and 16% higher returns three years after the splits.

A 2003 follow up study reviewed stock splits between 1990 through 1997. However, this research included 2 for 1, 3 for 1, and 4 for 1 stock splits. Once again, companies initiating splits outperformed the market by 8% in the year following the split and beat the market by 12% over a three year period.

Of course, the study results do not guarantee market beating returns should Microsoft initiate a stock split.

Arguments Against A Split

There are indications that there are fewer stock splits than in the past. Perhaps this is due to higher share prices reducing volatility, a factor that could weigh on a management team’s decision regarding splits.

There are also arguments that the rising popularity of ETFs, the ability to purchase fractional shares, and the reduced cost of transactions in general, that there is a lesser need for stock splits.

I should note I avoid some stocks when considering options contracts because the price of 100 shares, or multiples thereof, can mean that a position would be greater than I prefer for a given equity. Since I often enter positions through put options, that can mean that I choose to shun certain investments, or limit their size.

Microsoft: How Do I Love Thee? Let Me Count The Ways

If passing over sound investments because the shares trade for or below fair value were a felony, I’d be serving a life sentence in investors’ prison.

However, Microsoft stock (and a handful of others) are an exception to my very stringent valuation criteria. The deviation from my normal investing pattern stems from my perception that the company has a long, clear growth runway. Furthermore, growth catalysts exist in multiple segments.

The most recent quarterly result supports my view. Office 365 Commercial increased revenue by 21%, LinkedIn revenue grew 23%, and Dynamics 365 recorded a 39% increase.

Intelligent Cloud, Windows Commercial, and Xbox content and services grew revenue by 26%, 10%, and 40% respectively.

One example of how the company develops growth is through its Teams business communication platform. In July of 2019, Teams counted 13 million daily active users (DAU) using the service. Later that year, the DAUs reached 20 million. By April of 2020, that metric had grown to 75 million, and the company recently boasted that Team reached the 115 million DAU mark.

Another example of how the company drives growth in its core products is SharePoint. Primarily sold as a document management and storage system, that platform grew by 100% in 2020 and now has 200 million active users.

With Teams, SharePoint and other offerings, MSFT drives engagement and growth in Office 365.

Microsoft Office currently holds a near 90% market share. The Office 365 division has lower margins than many of the company’s businesses, but it strengthens Microsoft's moat and provides a reliable revenue stream. With 28% YoY growth, it is reasonable to expect more from 365 in the future.

Gaming revenue for the company is accelerating. Last quarter gaming brought in $5 billion, a 51% surge. While that represents a single digit fraction of total revenue, gaming is an arena with significant growth prospects. The gaming industry is projected to grow at a CAGR of 12% from 2020 through 2025. To understand the potential, one should know that revenue from video gaming surpasses that of any other entertainment industry.

The Xbox Game Pass subscription service has 18 million subscribers, with 3 million new members added in the last quarter alone; however, Microsoft has plans to drive growth through production of game titles.

Late last year, the company moved to acquire video game studio ZeniMax Media. ZeniMax is the owner of some of the industry's leading game studios, including Bethesda Softworks. The deal is for $7.5 billion in cash and should close in the latter half of 2021.

Global gaming topped $159 billion last year and is expected to reach $200 billion by 2023; however, the lion’s share of gaming revenue is generated by the games, not the hardware. Therein lies the motivation for the recent acquisition.

Microsoft’s security business is seldom mentioned by analysts, but over the last twelve months it surpassed $10 billion in revenue and achieved a 40% growth rate.

While management can be lauded for robust growth stemming from varied sources, I view Azure and its related businesses as the primary reason I am confident my investment in Microsoft will outperform.

Source: MarketsAndMarkets

The global cloud computing market is projected to more than double in size from 2020 through 2025. Forecasts are for spending to increase at a CAGR of 17.5%, growing from $371.4 billion today to $832.1 billion in 2025.

The chart below provides a picture of the continuing growth of Azure.

Source: Company Quarterly results

While Azure still ranks second in market share behind AWS, Microsoft is slowly whittling away Amazon’s (AMZN) lead. At the end of 2017, MSFT held 17% of the market. At the end of 2021, Azure had a 20% share and the piece of the pie held by AWS remained stagnant at around 30%.

Viewing Microsoft’s Growth From A Different Perspective

There is a reason why someone once said a picture is worth a thousand words. I am quite familiar with Microsoft and its growth trajectory from my repeated articles on the stock; however, it wasn’t until I put the data in the chart below together that I truly appreciated the firm’s history of growth.

Source: MSFT Quarterly/Annual Reports

In the span of six quarters, growth increased to the point that Q2 2021 revenue equals more than a third of the revenue for FY 2019. Viewed from another perspective, the last quarter’s revenue was 36% higher than the average quarterly revenue in 2019.

Debt, Dividend, And Valuation

Microsoft is one of only two publicly traded stocks with a AAA credit rating from S&P. At the end of Q2, total debt was $60.5 billion while cash stood at $132 billion.

The yield hovers around 1%, the payout ratio is roughly 30%, and the five year dividend growth rate is 9.82%.

As I type these words, the shares trade for $231.65. The average one year price target of 33 analysts is $268.82. Only two analysts revised their price targets following the last quarterly report. One has a target of $292, the other of $290.

MSFT has a current P/E of 33.77, a forward P/E of 28.03, and a PEG of 2.02.

Seeking Alpha’s Factor Grades rate the valuation as a D.

Is Microsoft Stock A Buy?

My research determined the odds of a stock split are good. Should that occur, there is significant research indicating the shares are likely to outperform the markets for three years following the split.

There is ample reason to believe MSFT will continue to grow revenues at a robust pace. The forecasts for cloud growth remain strong, a number of the company’s businesses recorded double digit growth in Q2, and several divisions that had previously lagged are experiencing rapid and likely sustained growth.

The portion of this article devoted to an assessment of the company is far from comprehensive. Rather, my goal was to highlight the strong points of the stock while illustrating that Microsoft has multiple avenues for growth.

In my mind, the only negative is the stock’s current valuation. Even with the growth the company is recording, I believe MSFT is trading well above fair value. Consequently, I rate MSFT as a HOLD.

Although I am a decidedly value oriented investor, I make rare exceptions for Microsoft and a few elite stocks with high growth rates and strong business moats. Consequently, I make small additions to my MSFT position whenever the company trades in a fair value range.

Some Fun Facts

When Microsoft had its IPO (on March 13, 1986), it traded for $21 a share. Adjusted for inflation, you and I could have invested a sum equal to $5019 today and held 100 shares a piece.

Fast forward to 2021. We would each have 28,800 shares worth around $6,600,000. The annual income from dividends would be $64,512. Assuming the five year dividend growth rate of (I’ll round it off) 9% continues, we would receive over $72,000 in payouts next year, and $78,480 in 2023.

Unfortunately, I haven’t been invested in MSFT that long.

This makes me wish I’d at least invested in a DeLorean and palled around with an eccentric friend named Emmett.

Analyst’s Disclosure: I am/we are long 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.

I have no formal training in investing. All articles are my personal perspective on a given prospective investment and should not be considered as investment advice. Due diligence should be exercised and readers should engage in additional research and analysis before making their own investment decision. All relevant risks are not covered in this article. Although I endeavor to provide accurate data, there is a possibility that I inadvertently relay inaccurate or outdated information. Readers should consider their own unique investment profile and consider seeking advice from an investment professional before making an investment decision.