Image Shown: While others said Microsoft’s stock was “dead money,” we were pounding the table on the idea!
Microsoft has been one of our favorite dividend growth stocks, one that we have highlighted many a time at presentations explaining the Dividend Cushion ratio. We trust you are benefiting greatly from this fantastic idea!
By Brian Nelson, CFA
It’s very challenging to hit the proper tone in any note that we write up, especially as we talk about one of our best stock ideas in recent years in the context of a broader stock market, in which the average S&P 500 company is trading at nearly 18 times forward 12-month earnings. What we’re trying to say is that, while we are extremely pleased with Microsoft’s (MSFT) fantastic fiscal first-quarter report, released October 26, and we’re excited about the stock’s surge to the mid-$80s (the “cost basis” in the Dividend Growth Newsletter portfolio, page 5, is a meager $25.96), we still have to remind readers to be cautious out there. But remember when ‘everyone’ was saying Microsoft was “dead money,” and we were pounding the table on its undervaluation and dividend growth prospects years ago? It makes us borderline ecstatic to have delivered on this tech giant idea.
Have a look at Microsoft’s stock web page:
Microsoft has had one of the most attractive dividend growth profiles across our coverage universe. It boasts an impressive balance sheet with a net cash position of ~$47 billion as of the end of fiscal 2017, not inclusive of $21 billion in long-term investments. It has been painting its recent acquisition of LinkedIn for $26.2 billion in a positive light, highlighting the expansion of its addressable market and the potential to drive engagement across LinkedIn and Office 365, but we aren’t fond of what it could do for Microsoft’s future dividend potential given the price tag and LinkedIn’s lack of a strong operating track record. However, the firm remains one of our favorite dividend growth ideas thanks to its balance sheet and strong free cash flow generating ability.
Microsoft’s shares are now trading above the high end of our fair value range ($82), so that, too, is why we’re struggling with the tone of this piece. But do we love the company’s fundamentals? Yes. Do we still love its dividend growth potential? Yes. As has often been the case in a marketplace that is growing as frothy as the current one, investors should be cognizant of valuations and watch for potential technical breakdowns like a hawk. Any technical breakdown could be the catalyst that sends equities back down to the midpoint of their fair value ranges, so please be careful out there. Today, October 27, however, we are celebrating this big win! Microsoft’s fiscal first-quarter report >>