Microsoft (MSFT) Stock—A Big Name Dividend Grower at a Big Discount

On June 8, Tom Hutchinson, Chief Analyst of our Cabot Dividend Investor advisory, wrote about his favorite cheap technology stocks to buy now. One of them was the largest stock in the world by market cap: Microsoft (MSFT) stock, which Tom says is well positioned to thrive in a post-coronavirus world.

Here were Tom’s thoughts:

Microsoft (MSFT) Stock

Microsoft needs no introduction. It is the largest software company in the world and an absolute behemoth in the technology sector with nearly $140 billion in annual revenues and $1.42 trillion in market capitalization. Microsoft’s monopoly-like positions in its computer operating systems and office applications drive enormous growth in other areas.

The company is best known for its Windows operating systems and Office productivity suite. But its services are more far reaching. There are three main business segments. The business segment includes Microsoft Office, cloud-based Office 365, Skype and LinkedIn. Cloud services include cloud computing platform Azure and Windows Server OS. And personal computing involves laptops, desktop, and tablets as well as gaming consul Xbox.

Over the past five years, Microsoft has grown earnings by an average annual rate of better than 18%. That’s astounding growth for an industry behemoth. The stock has returned an average of over 30% per year over the same period.

How is Microsoft doing in this pandemic disaster? It reported first-quarter earnings at the end of April, reporting a 15% increase in revenue and a 23% rise in adjusted profits compared to last year’s quarter. The results were largely driven by the company’s huge presence in cloud computing. The company saw a 30% rise in commercial cloud computing revenues in the quarter, which now account for more than a third total revenues.

Microsoft’s subsidiary Azure, which offers cloud solutions that allow businesses to transfer IT solutions to the cloud, saw revenue growth of 59% year over year for the quarter. Azure is now the second-largest cloud services provider in the country.

And that revenue soared with only a few weeks of social distancing in the quarter. The trend will accelerate and working from home promises to be more prominent on a permanent basis after things return to normal.

The company is in stellar financial shape with over $137 billion in cash and only $63 billion in debt. The dividend is small with a 1.09% yield at the targeted price. But the company only has a 32% payout ratio and has raised the dividend in all the 16 years it has been paying a dividend, and by an average of 13.2%.

Do you think technology will become less of a factor or more of a factor going forward? I believe we are about to enter a new era in tech dominance. And Microsoft is a blue-chip company poised right in front of the trend and leading the charge.

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