from 100% Letter
For Microsoft (MSFT), 2002 to 2012 was a lost decade as the stock generated zero return, outside of dividends. The company had a virtual monopoly on PC software with Microsoft Windows, and a dominant enterprise software business. But in the middle of the last decade the competition raised the bar. Many new devices, such as those from Apple (AAPL) and Google (GOOG), didn’t need Microsoft’s operating system. And by most accounts, the release of Windows Vista in 2007 was a flop.
Despite a nice dividend, shares of Microsoft were not all that enticing. But that’s changed. The release of Office 365—a cloud-based version of the company’s most popular applications—is likely to be the biggest strategic move by the company in years. The consumer version includes Word, PowerPoint and Excel and offers online storage
The stock could easily trade up to a forward PE of 18 based on my forward EPS estimate of $3.10. That implies 10% near-term upside in the stock. While that doesn’t sound like a lot of upside potential, I firmly believe that a 10% gain here is just the beginning.
Over the next two years, I expect the company will increase its dividend payments and stock buybacks, as well as sell non-core, underperforming assets. Any of these events will add meaningful upside.
Including dividends, I expect Microsoft could return 10% to 20% annually over the next three years. That’s just too attractive to pass on.
Tyler Laundon, The 100% Letter, www.100percentletter.wyattresearch.com, 866-447-8625, November 25, 2014
