The Only Reason Investors Need to Own Microsoft Corporation (MSFT)
Microsoft Stock Delivers Big Returns
Let’s be honest here; despite being in the tech sector, Microsoft Corporation (NASDAQ:MSFT) stock is far from being the most exciting name in today’s stock market. And the reason is simple: with so many trending tickers making double-digit swings every other day, why bother looking at a four-decade-old company?
However, Microsoft stock has something that very few of these trendy names have: the ability to consistently return value to investors.
You see, stock market participants can bet on the future however they want. But if you are investing rather than trading, you want the companies you invest in to return value to you at some point.
Of course, not every company is at the point where it can make dividend payments and stock buybacks on a regular basis. This is particularly true in the tech sector. Many companies have to reinvest their earnings (if they have any) just to stay relevant in this fast-changing industry.
That’s why Microsoft stock is special. It not only pays quarterly dividends with a 2.6% annual yield, but also rewards investors with regular, sizable share repurchases. The company recently announced a new stock buyback program, authorizing up to $40.0 billion in share repurchases, and is on track to complete its existing $40.0-billion share repurchase program by the end of this year. (Source: “Earnings Release FY17 Q1,” Microsoft Corporation, October 20, 2016.)
Whether through dividends or buybacks, Microsoft is generous when it comes to returning value to shareholders. With buybacks, investors don’t get a check directly. But by reducing the number of shares outstanding, Microsoft is allowing each shareholder to own a slightly larger portion of the company.
Of course, as a dividend stock, MSFT stock probably doesn’t sound as impressive as something like Johnson & Johnson (NYSE:JNJ). But note that over the years, Microsoft has raised its payout substantially. In just the past five years, the company’s quarterly dividend rate has nearly doubled. (Source: “Dividends and Stock History,” Microsoft Corporation, last accessed December 5, 2016.)
When companies are deciding whether or not to pay a dividend, they have to think whether the payout is going to be sustainable. This is because in the stock market, few things disappoint investors more than a dividend cut.
By paying a dividend and growing it, Microsoft shows that it has a sustainable profit engine. As a matter of fact, by certain measures, Microsoft is one of the most financially solid companies in the entire U.S. stock market.
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According to rating agency Standard & Poor’s, there are only two non-financial companies with AAA credit ratings. One of them is Johnson & Johnson, a company that needs no introduction to dividend investors. Can you guess what the other one is? Yup, it’s Microsoft. (Source: “There are only two companies left with top-notch AAA credit ratings,” Quartz, April 27, 2016.)
That is, Microsoft has earned a more prestigious rating than the U.S. government.
The Bottom Line on Microsoft Stock
The best part is that despite being four decades old, the company is still growing. In the September quarter, Microsoft’s adjusted revenue increased five percent year-over-year under constant currency. Adjusted earnings came in at $0.76 per share, a 13% improvement from the year-ago period. (Source: Microsoft Corporation, last accessed December 5, 2016, op cit.)
Microsoft is dominating markets with high barriers to entry. Whether it’s the operating systems market or the productivity software market, the company should have no problem maintaining and defending its very strong market positions. Its move to cloud-based software subscriptions from on-premise licensing should help it grow recurring revenue and cash flow even further.
For investors looking for a long-term dividend play, MSFT stock should be near the top of their lists.
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