This company has been one of the stock market’s shining stars during the COVID-19 pandemic thanks to a rise in demand for its cloud-computing.
Steady cash flow from selling software as a subscription also gives the company plenty of room to invest in new products and to raise its dividend.
MICROSOFT CORP., (Nasdaq symbol MSFT; www.microsoft.com) is the world’s largest software company. Its Windows operating system powers about 85% of the world’s personal computers.
Microsoft’s other main product—its Office suite, with its word processor (Word), spreadsheets (Excel) and slide presentations (PowerPoint)—controls over half of its market.
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The company continues to benefit from its 2014 decision to use an online subscription model (cloud computing) to sell its services.
Microsoft’s main cloud service is Microsoft Azure, which lets individuals and businesses manage their databases online and store their files on remote servers.
The company also spurs its growth with acquisitions. In December 2016, it paid $27.0 billion for LinkedIn, the world’s largest online professional network. LinkedIn’s 690 million members can create, manage and share their career details and connect with other members.
Microsoft also paid $7.5 billion in October 2018 for GitHub, which provides software developers with a platform for learning about and developing software.
The company gets just over half of its revenue from customers outside of the U.S., and the higher U.S. dollar cut its revenue by 2.6%, from $93.58 billion in 2015 to $91.15 billion in 2016 (fiscal years end June 30). However, Microsoft’s revenue rebounded 5.9%, to $96.57 billion in 2017, and rose a further 14.3% to $110.36 billion in 2018. In fiscal 2019, the company’s revenue gained 14.0% to $125.84 billion.
Microsoft’s overall earnings jumped 109.0%, from $12.19 billion in 2015 to $25.49 billion in 2017. On a per-share basis, earnings increased 119.6%, from $1.48 to $3.25, on fewer shares outstanding. A charge related to the U.S. tax reforms cut Microsoft’s earnings to $2.13 a share (or a total of $16.57 billion) in 2018. Earnings then recovered to $5.06 a share (or $39.24 billion) in 2019. If you exclude all unusual items, earnings per share rose 22.4%, from $3.88 in 2018 to $4.75 in 2019.
In its fiscal 2020 third quarter, ended March 31, 2020, the company’s revenue rose 14.6%, to $35.02 billion from $30.57 billion a year earlier. That gain was mainly due to a 38.5% jump in revenue at its main cloud businesses. They include Azure, Office 365 and. As a group, they accounted for 38% of total revenue in the quarter. Earnings jumped 22.8%, to $1.40 a share (or a total of $10.75 billion) from $1.14 a share (or $8.81 billion).
Microsoft’s research costs in the quarter rose 13.2%, to $4.89 billion (or 14.0% of its revenue) from $4.32 billion (14.1%) a year earlier. The company focuses most of that spending on improving its cloud-based software products.
Thanks to those upgrades, the U.S. Department of Defense recently selected the company’s Azure cloud-computing platform over rival Amazon Web Services. (Note: Amazon.com is a recommendation of Power Growth Investor, our newsletter that focuses on aggressive stocks.) This 10-year deal is worth up to $10.0 billion.
The company is also seeing strong demand for another new product—its Microsoft Teams video conferencing software. Due to the COVID-19 lockdowns, Microsoft Teams had 75 million daily users in April 2020.
Dividend Stocks: New products and a strong balance sheet point to future growth
In addition to software, Microsoft continues to expand its portfolio of hardware products. The best known of those is its Xbox video gaming console. Gaming revenue (including sales of new consoles and downloads of games and other content) fell 0.6% in the latest quarter to $2.35 billion (6.7% of total revenue). That’s because COVID-19 forced many electronics retailers to temporarily shut down. Consumers are also putting off new purchases as Microsoft plans to launch a new Xbox console (called Xbox Series X) in time for the upcoming holiday shopping season.
The company’s strong balance sheet will let it keep developing new products. As of March 31, 2020, it held cash of $137.6 billion, or $18.13 a share. Its long-term debt of $62.9 billion is a low 4% of its market cap.
Despite the uncertainty caused by the pandemic, Microsoft remains an active buyer of its own shares—it repurchased $7.1 billion of its shares in the latest quarter. Share buybacks raise earnings per share and other per-share calculations. That gives Microsoft’s remaining investors a larger stake in the company.
Microsoft recently announced a new $40 billion share repurchase plan. It still has $36.8 billion remaining. There are no time limits for those purchases.
The company also has a long history or rewarding shareholders with regular dividend increases. In fact, it began paying regular dividends in 2004 and has raised that rate each year since 2010. The last increase came in December 2019 when it boosted the quarterly payment by 10.9%, to $0.51 a share from $0.46. The new annual rate of $2.04 yields 1.0%.
Due to the stock’s strong performance—it’s up 48% in the past year—your shares now trade at a high 34.8 times the $5.69 a share that Microsoft should earn in fiscal 2020. However, that’s an acceptable multiple in light of the company’s high market share and fast-growing cloud business.
In the meantime, Microsoft plans to close its roughly 80 retail stores in the U.S., Canada, Australia and the U.K. Those outlets mainly sell the company’s Surface tablet computer.
The COVID-19 pandemic forced many of those stores to temporarily shut down. As a result, customers shifted their orders to the company’s websites. Surface tables are also available at big retail chains such as Walmart and Best Buy, so re-opening its own stores doesn’t make sense.
Costs associated with shutting down the physical stores will cut Microsoft’s earnings by $450 million, or $0.05 a share. That’s a small charge next to the $10.75 billion, or $1.40 a share, the company earned in the three months ended March 31, 2020.
Under the heading of Dividend stock you have put Microsoft. However, (as you say), the new annual rate of $2.04 yields just 1.0%. Perhaps that very low dividend does not warrant being classified as a dividend stock. I hold it for its capital appreciation and it has already doubled for me.
Thanks for your comment. While its yield is low — it’s also highly sustainable. As well, there is scope for dividend increases, or perhaps a special dividend. But certainly, the main appeal of Microsoft right now is capital growth.
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Under the heading of Dividend stock you have put Microsoft. However, (as you say), the new annual rate of $2.04 yields just 1.0%. Perhaps that very low dividend does not warrant being classified as a dividend stock. I hold it for its capital appreciation and it has already doubled for me.
sorry about the typing errors. Please correct them before publishing my comment
Will do, thanks.
Thanks for your comment. While its yield is low — it’s also highly sustainable. As well, there is scope for dividend increases, or perhaps a special dividend. But certainly, the main appeal of Microsoft right now is capital growth.