Image Source: Mike Mozart
Simulated Dividend Growth Newsletter portfolio idea Microsoft reported impressive results in its fiscal first quarter, and its robust free cash flow generation continues to pave the way for future dividend increases.
By Kris Rosemann
Shares of simulated Dividend Growth Newsletter portfolio idea Microsoft (MSFT) received a nice boost after its fiscal 2019 first quarter report, released October 24. Revenue in the quarter advanced 19% on a year-over-year basis to $29.1 billion, led by 24% revenue growth in its ‘Intelligent Cloud’ from the year ago period as strength in Azure continues to drive server products and cloud services revenue higher. The company’s ‘Business Processes’ segment turned in 19% year-over-year revenue growth in the quarter thanks to continued momentum in Office commercial and consumer products, 33% revenue growth at LinkedIn, and a 20% increase in Dynamics products and cloud services revenue. The ‘More Personal Computing’ segment drove revenue 15% higher from the comparable period of fiscal 2018 as gaming revenue leapt 44% on a year-over-year basis.
Despite Microsoft’s impressive top-line growth, its gross margin contracted slightly on a year-over-year basis due to a sales mix shift towards gaming and commercial cloud. Nevertheless, operating margin expanded by nearly 3 percentage points from the year-ago period as investments in the company’s engineering and sales capacity in large and growing markets are generating notable operating leverage, and operating income jumped 29% from the comparable period of fiscal 2018 to ~$10 billion, led by 37% year-over-year operating income growth in ‘Intelligent Cloud.’ Diluted earnings per share came in at $1.14 in the quarter, good for 36% growth from the year-ago period.
Microsoft’s bottom-line performance translated nicely into strong cash flow generation as cash from operations advanced nearly 10% on a year-over-year basis to ~$13.7 billion, but a nearly 70% increase in capital spending drove free cash flow lower by roughly 2.5% from the year-ago period to ~$10.1 billion. This was still more than sufficient in covering cash dividends paid in the quarter of $3.2 billion, and the company’s net cash position continued to grow. As of the end of the first quarter of fiscal 2019, it held $135.9 billion in cash, cash equivalents, and short-term investments compared to total debt of $76.2 billion, which is good for a net cash position of $59.7 billion compared to $57.5 billion one quarter earlier.
Microsoft’s Dividend Cushion ratio was an impressive 3.6 at last check, and shares yield ~1.7% as of this writing. We expect the company to continue delivering reliable income to investors, even as it is investing for growth in a material way. Our current fair value estimate for Microsoft sits at $116 per share.
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Kris Rosemann does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.