Microsoft: Dead Money

| About: Microsoft Corporation (MSFT)
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By Steven Edwards

Microsoft's (NASDAQ:MSFT) 200 day moving average has been close to flat-lined for the last decade. Look at it closely over the last few months and you can detect a little upward movement, based probably on hopes for another increase in the dividend, perhaps some misplaced optimism over its upcoming Windows 8 operating system, or maybe it is just a reflection of the appreciation of stock prices in general.

Microsoft remains a cash cow, coasting off the revenues from its PC and server software and Xbox 360 business, not to mention interest on its cash hoard, which is in excess of 60 billion. Its online services division includes MSN and the high profile Bing search. The latter is second in market share to Google (NASDAQ:GOOG). But unlike Google, which makes most of its money on internet ads, Microsoft's internet services operate at a substantial loss.

Once upon a time, Microsoft became a colossus by dominating the market for personal computer software, while Apple (NASDAQ:AAPL) produced niche products for artsy types who appreciated its focus on design. Somewhere along the line, the world changed but Microsoft failed to change with it. Microsoft still dominates the PC market, to be sure, but PCs are less and less important. The world has gone mobile, and Apple's iPads and iPhones are all the rage. If you can't make it in mobile, you can't make it for long.

Microsoft, of course, understands this. Its new Windows 8 system is supposed to work across platforms, from PCs to tablets to phones. Microsoft has partnered with another former world-beater, Nokia (NYSE:NOK), which once owned half of the worldwide market for smart phones, but now is struggling for survival. A few days ago, the two companies unveiled the fruits of their collaboration, the Windows-based Lumia 920, to an underwhelmed world. Nokia's stock price immediately tanked 16% in U.S. markets. For Nokia, the success of Lumia is a life or death proposition. The company is already hemorrhaging cash and slashing thousands of employees. For Microsoft, Lumia would have to be a substantial hit, a credible alternative to iPhones or Android phones, to move their earnings needle much.

But Microsoft needs Lumia or a Windows smart phone somewhere to be a hit for the company to have a long term future in mobile. Currently, iPhones and Android (most built by Samsung (KRX:005930)) phones together have 85% of the total market for smart phones, while Windows phones have a miserable 3.5% market share. Given the tepid reception for the Lumia, the future doesn't look bright.

So why would you buy Microsoft? You might think of it as a high tech utility. The company has a current dividend yield of 2.6%, low by utility standards, but that dividend has been increasing rapidly by almost 15% per year for the last five years. The expectation is that it will be raised again next quarter. A problem for Microsoft is that, like Mitt Romney, the company has kept most of its cash overseas to avoid taxation. In order to continue raising its dividend, it will have to fork over some of its cash to Uncle Sam.

Microsoft is now trading at price to earnings (NYSE:PE) ratio of 15.35, which is as high as it has been for the last 5 years. By contrast, its five year growth in sales and earnings are about 7%. Its earnings are actually down in the latest year and expected by analysts to be lower for at least the next two quarters.

Apple also has a PE ratio of about 15, but its five year growth in earnings is 65%. If you're looking for a tech stock, why would you buy Microsoft if you could buy Apple for the same price?

Another interesting statistic is that, despite its cash hoard, Microsoft's capital spending has been essentially flat for five years. The company seems stuck in a holding pattern.

Index funds have to buy Microsoft because of its size and inclusion in various indexes: the Dow, the S&P 500, and the Nasdaq 100, among others. For hedge funds, Microsoft is the third largest holding, but then hedge funds have badly underperformed the averages this year.

In the not too distant future, Microsoft will bring out its nth iteration of Windows and nobody will care. Let me explain with a little parable. After twenty years of faithful service, my neighbor's air conditioner broke down and he had to replace it. He went back to the same company and bought their newest version. It looked remarkably similar, except that it didn't weigh quite as much. He didn't even switch out the bracket because the bolt holes lined up perfectly. At some point, you reach a point of diminishing returns with perfecting an old technology.

Nobody really needs a new version of Windows, except Microsoft, so that it has something to sell. Executive assistants everywhere already cringe whenever a new version of Office comes out, because it is already way too complex for 99% of the people who use it, loaded down with largely unnecessary bells and whistles.

Do not buy Microsoft. If you're looking for yield, buy a real utility.

Disclosure: This article is written by a contract writer and edited by me. We don't receive compensation for it other than from Seeking Alpha. We have no business relationship with any company whose stock is mentioned in this article, no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.