There aren’t many people with a love of Microsoft. Whether it is too big, too old, too bullying or too geeky, it is difficult to know; perhaps it is all of those, but it is still a powerful beast.
Anyway, I will take a look at it and try to decide whether its distinct lack of passionate advocates has made it cheap.
Here are the numbers for the last five years:
Year Rev EPS
2009 $58.4 $1.62
2010 $62.5 $2.10
2011 $69.9 $2.69
2012 $73.7 $2.00
2013 $77.8 $2.58 *includes $0.09 hit for that old rottweiler, the European Commission
Microsoft, over these years, grew its revenues by 33% producing a compound annual growth rate of 7.43%. EPS grew 12.34%, moving more quickly due to share buybacks. Despite this, however, cash and short-term investments still grew from 31 billion to 77 billion over that period, which leaves room for plenty further buybacks or investments.
At around $38 MSFT is trading for 15 times its most recent fiscal year EPS, which is… not as cheap as it used to be. The consensus for this year is about 2.75, and so it is trading at nearly 14 times that, which is a bit better than fair. This is without the large amount of cash and cash equivalents on the balance sheet, which is earning next to nothing. With 8.3 billion shares outstanding that is $9 per share. Taking this from the share price would mean that you are getting the operating business for $29 per share.
At $29 per share, you are getting MSFT at 11x last year’s earnings and 10.5x this year’s consensus earnings. Not expensive, by any means.
How is Microsoft shaping up in terms of dividends? Here is the 5-year track record:
2009 $0.52
2010 0.55
2011 0.68
2012 0.83
2013 0.97
This is a dividend growth rate of 16.87%, which is excellent, and if last year’s payout were even to be matintained, it would be on a dividend yield of 2.6% for this year. That is almost neck-in-neck with the US Treasury. Last year’s dividend ($.97) was covered 2.7 times by earnings, leaving plenty of scope for dividend increases.
By another metric, the earnings yield is 7.1%, whereas the 30-year T-Bond yield is currently 3.59%. And, surely, it would not be aggressive to suggest that MSFT could expect to grow its earnings in the coming years, which would leave the treasury gains for dust.
Another ace-up-the-sleeve, is the potential for a spin off of Microsoft’s consumer business, which includes the Xbox and search advertising. This would enable the management to focus on the core business, which is selling software and services to business. In fact, I think that Paul Allen has called for this in the past and it is the sort of cause that, perhaps, might bring an activist investor out of the woodwork in the future. The Xbox really doesn’t seem to belong in the Microsoft stable.
All in all, Microsoft still looks like a great company thoroughly embedded into businesses the world over and must be a solid bet to profit as the global economy make progress in the years to come. Its large amount of cash and steady revenue growth is also reassuring.
But, is there a better bet out there? What about that real old dinosaur, IBM?
Disclosure: No position
Disclaimer: This post is not a recommendation to either buy or sell. Please consult your investment advisor.