A decision to change the way it does business is paying off for this stock.
The shift from selling software to cloud-based subscriptions has boosted revenue and earnings, and the company made a recent acquisition that will enhance its service. With a rise of more than 50% in the past year, the shares trade at a high level to projected earnings, but the company’s business continues to grow.
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MICROSOFT CORP. (Nasdaq symbol MSFT; www.microsoft.com) is the world’s largest software company. Its Windows operating system powers about 90% of the world’s personal computers.
Microsoft continues to benefit from its 2014 decision to shift to cloud-computing services: instead of buying its software as a one-time purchase, clients now access that software online through subscriptions. They can also store data files using remote servers.
As part of that strategy, the company recently agreed to pay $7.5 billion in stock for GitHub, which operates a website that lets computer programmers share code and collaborate on software projects.
The company will pay $7.5 billion in stock for that privately held firm. To put that cost in context, Microsoft’s market cap (the total value of all outstanding shares) is $780.8 billion. It expects to complete the purchase by the end of 2018.
Buying GitHub will help the company improve its cloud computing operations. They lets users access programs online instead of buying software as a one-time purchase.
However, many software developers worry that Microsoft will block them from accessing some of GitHub’s data. They also fear the company could analyze GitHub’s traffic to identify new trends in the software industry and launch competing products. Those factors could prompt those users to share less of their code.
Dividend stocks: Revenues rise for all three businesses in latest quarter
Meantime, Microsoft’s revenue in its fiscal 2018 fourth quarter, ended June 30, 2018, rose 13.1%, to $30.0 billion from $23.2 billion a year earlier. Revenue rose at all three of its businesses: More Personal Computing (36% of the total), up 17.1%; Productivity and Business Processes (32%), up 13.1%; and Intelligent Cloud (32%), up 22.8%.
Microsoft earned $8.8 billion in the quarter. That’s up 5.5% from $8.3 billion a year earlier. Earnings per share rose 6.6%, to $1.13 from $1.06, on fewer shares outstanding.
The company’s research spending in the quarter rose 11.9%, to $3.9 billion (or 13.0% of its revenue) from $3.5 billion (11.9%) a year earlier.
Microsoft’s strong balance sheet will let it keep investing in its operations. As of June 30, 2018, it held cash and investments of $133.8 billion, or $17.42 a share. Its long-term debt of $72.2 billion is a low 8% of its market cap.
The company began paying regular dividends in 2004. It last raised the quarterly payment by 7.6% in December 2017, to $0.42 a share from $0.39. The annual rate of $1.68 yields 1.6%.
The stock has jumped 53% in the past year and now trades at 25.8 times the $4.27 a share that Microsoft should earn for fiscal 2019. That’s a reasonable multiple in light of the company’s fast-growing cloud business. The $1.68 dividend yields 1.5%.
Recommendation in TSI Dividend Advisor: Microsoft is a buy.
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