MSFT Stock: Why Income Investors Should Own Microsoft Corporation
Can Microsoft Stock Provide More Than Just Dividends?
Microsoft Corporation (NASDAQ:MSFT) stock is kind of old news. The company has been around for over four decades and its products and services are well-known among consumers and investors alike. With so many new tech companies making exciting products right now, is there still a reason for investors to own MSFT stock?
I believe the answer is “yes.” Here’s why.
Before we take a look at an exciting new reason, let’s revisit an old one: Microsoft runs a business that generates recurring revenue.
As its name suggests, Microsoft is a software giant. When it comes to providing software and services to consumers and businesses, few companies have the market position of Microsoft. Its “Windows” operating system (including “Windows XP,” “Windows 7,” “Windows 8,” and “Windows 10”) currently has an 88.67% share in the desktop operating system market. Its “Office” suite of productivity software is in use at 80% of all Fortune 500 companies. (Source: “Desktop Operating System Market Share,” NetMarketShare.com, last accessed January 13, 2017.)
Moreover, Microsoft also runs a successful cloud computing business. “Microsoft Azure” is considered to be the second-largest cloud service provider in the world, only behind Amazon.com, Inc.’s (NASDAQ:AMZN) “Amazon Web Services” (AWS). (Source: “Top 10 Cloud Computing Companies,” Datamation, August 1, 2016.)
While Windows, Office, and Azure probably don’t sound as exciting as some of the new hardware devices on the market right now, note this: software and services don’t have to follow the same product update cycle as hardware devices. In addition, a lot of the revenue could be recurring.
Having recurring revenue is a necessary component of a solid dividend stock. And indeed, Microsoft stock has been rewarding income investors for over a decade. Since the company started paying a dividend in 2004, its quarterly dividend rate has increased by 387.5%. That’s a compound annual growth rate of 13%. (Source: “Dividends and Stock History,” Microsoft Corporation, last accessed January 13, 2017.)
Right now, the company pays $0.39 on a quarterly basis, giving MSFT stock an annual dividend yield of 2.49%.
Of course, as a tech company, Microsoft also needs to reinvest for the future. Are the dividend hikes too aggressive? Well, in Microsoft’s fiscal 2016, the company declared $1.44 of dividends per share while earning $2.10 per share, meaning it was not paying out all its earnings. (Source: “Earnings Release FY16 Q4,” Microsoft Corporation, July 19, 2016.)
But this is old news. Is there anything that could cheer up Microsoft stock investors right now?
A New Reason to Own MSFT Stock?
As it turns out, other than its well-known products and services, Microsoft is also involved in one of the hottest areas in technology today: driverless cars.
Microsoft is not building an autonomous vehicle from the ground up. Rather, it is building a platform that can power driverless cars in the future. At this year’s Consumer Electronics Show in Las Vegas, the company unveiled its “Connected Vehicle Platform,” which is built on the Microsoft Azure cloud and “designed to empower auto manufacturers to create custom connected driving experiences.” Carmakers Renault and Nissan are the first automakers to commit to Microsoft’s platform. (Source: “Microsoft Connected Vehicle Platform helps automakers transform cars,” Microsoft Corporation, January 5, 2017.)
When cars can drive themselves in the future, they will have a new set of functionalities. For instance, people could use autonomous vehicles as their new office on the road. And that office will need an operating system. Microsoft built its business by making the operating systems for personal computers. If the new platform can become the default operating system for driverless cars in the future, it could be a huge catalyst for MSFT stock.
With its solid dividends and the potential to reap rewards from an upcoming industry, Microsoft stock still deserves a spot in an income investor’s portfolio.