Microsoft, the cash cow
The software giant may not be a high-powered growth machine anymore, but it offers financial strength and an attractive yield.
(Fortune Magazine) -- With the stock market finally showing that it can go up as well as down, you might be wondering if you should get back into the fray - and worried about the possibility of more dips to come. One relatively low-risk strategy is to look for financially sound companies that offer both reliable dividends and the prospect of some real upside in share price. A sterling example: the world's largest software maker, Microsoft, which has an annual dividend yield of just under 3%.
Microsoft's stock has suffered along with the rest of the market, falling about 40% over the past 12 months, mirroring the S&P 500. And it could certainly go lower. On March 9, when the market had a particularly tough day, shares fell below $15, a level not seen since 1997. But since that dip the stock has climbed almost 20% and in recent months has shown resilience in the $16 range.
Microsoft is being challenged by the likes of Google (GOOG, Fortune 500) and Apple (APPL), as more software and services are delivered via the Internet or a mobile device. But let's face it, people are not abandoning PCs anytime soon, especially for work, even if they are migrating to lower-cost "netbooks." Over the next three years or so, Microsoft (MSFT, Fortune 500) will maintain its very lucrative grip on the market for computer operating systems (Windows 7 is coming this year), and desktop and business products like its Office software. And it stands a good chance of adding Yahoo's (YHOO, Fortune 500) online search business to the fold as well.
"The next 15 years aren't going to be as good for Microsoft as the last 15," says Toan Tran, associate director of research at Morningstar, which has a buy rating and a fair-value estimate of $35 on the stock. "But Microsoft will do well when the economy turns around. Sure, cloud computing [delivering software and services via the Internet] is a threat, but nothing you can do over the next year is going to have much of an effect on their business."
Investors are treating Microsoft like a cash cow rather than a growth engine: The stock trades around 10 times estimated 2009 earnings, vs. just north of 13 for the S&P 500, 16 for Google, and 20 for Apple. So if earnings grow as the economy recovers, investors have the potential for a real bounce in the share price.
And don't forget that dividend. Is it safe? With more than $20 billion in cash in the most recent quarter, and annual free cash flow of $17 billion, there is not much question that Microsoft can afford the current quarterly payout of 13 cents a share. The company may not keep raising the dividend annually, as it has done since first offering one in 2003, but it's not likely to cut it either.
Bob Turner, who manages $15 billion at Turner Investment Partners, based in Berwyn, Pa., isn't investing in Microsoft right now, because it doesn't have enough of a growth story for his fund. But he endorses it for value investors. "If you are comparing it with other technology companies, shares of Qualcomm, Apple, and Broadcom could grow faster," Turner says. "But if you compare it with other dividend stocks like, say, AT&T, I would rather own Microsoft at a yield of 3% than AT&T at 5%, because Microsoft has better growth prospects."
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