Dividend Growth Newsletter portfolio holding Microsoft (MSFT) announced the restructuring of its phone hardware business July 8. In addition to a restructuring charge in the range of $750-$850 million, the company will record an impairment charge of ~$7.6 billion related to assets from the acquisition of the Nokia (NOK) Devices and Services business, which closed just under a year ago. Microsoft also announced it will cut up to 7,800 jobs, primarily in the phone business. The non-tax-deductible impairment charge will be recorded in the fourth quarter of fiscal 2015, which ended June 30, and the job cuts are expected to take place over the next several months.
These sweeping initiatives underscore Microsoft’s efforts to refine its focus to meet ever-changing consumer preferences and better align with company priorities. Management is working to move from its initial strategy of growing a standalone phone business to a strategy of incorporating its first-party mobile device family within its Windows ecosystem. The near-term focus will now be on running a more effective phone portfolio while retaining the long-term reinvention potential in mobility. Microsoft, under CEO Satya Nadella, has not been shy about making tough decisions to position itself effectively for the future.
But the announcement does not mark the beginning of the firm’s efforts to refine and align its businesses. In late June, Microsoft announced that it will no longer collect mapping imagery for its Bing maps service. The firm sold its image collection assets and engineers to Uber for an undisclosed amount, shedding operations that aren’t core to its larger-scale platform. Also in late June, Microsoft and AOL, the latter to be acquired by Verizon (VZ) announced a partnership in which AOL will manage and assume sales responsibility of all of Microsoft’s display, mobile, and video advertising inventory in nine key global markets–yet another disposal of operations that are not core to the company’s strategies.
Clearly, Microsoft is determined to reduce its fray businesses and strengthen its core. We like the idea of the tech giant refocusing its mobile device efforts to incorporate its growing Windows ecosystem. Though Microsoft has been a fantastic performer in the Dividend Growth Newsletter portfolio, challenges still remain as it works to overcome PC-sale headwinds, as with the rest of the PC supply chain, including Intel (INTC), AMD (AMD), among others. We continue to like Microsoft’s cash-rich balance sheet and fantastic dividend growth prospects, and we haven’t soured on its valuation either. Shares are worth $56 each, in our opinion.