This article originally appeared on The DIV-Net November 3, 2008.
Linked here is a PDF copy of my detailed analysis of Microsoft Corporation (MSFT). Below are some highlights from the above linked analysis:
Company Description: Microsoft is the world’s largest software company. It develops PC software, including the Windows operating system and the Office application suite.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
- Avg. High Yield Price
- 20-Year DCF Price
- Avg. P/E Price
- Graham Number
MSFT is trading at a discount to 1.), 2.) and 3.) above. If I exclude the high and low valuations and average the remaining two, MSFT is trading at a 35.1% discount. MSFT earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:
- Rolling 4-yr Div. > 15%
- Dividend Growth Rate
- Years of Div. Growth
- 1-Yr. > 5-Yr Growth
- Payout 15% of avg.
MSFT earned two Stars in this section for 1.) and 2.) above. Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (1998-2001, 1999-2002, 2000-2003, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. MSFT has paid a cash dividend to shareholders every year since 2003 and has increased its dividend payments for 5 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
- NPV MMA Diff.
- Years to >MMA
MSFT earned one Star in this section for 1.) above. The NPV MMA Diff. of the $11,718 is in excess of the $10,000 minimum I look for in a stock that has increased dividends as long as MSFT has. If MSFT grows its dividend at 16.3% per year, it will take 9 years to equal the cumulative earnings from a MMA yielding an estimated 20-year average rate of 4.61%. .
Other: MSFT is a member of the S&P 500. MSFT’s ongoing antitrust-related issues is a concern. Open source applications and operating systems may pose a threat. Recently, MSFT to lowered its revenue growth outlook by 5% as a result of weakening business conditions. As a result of releases of Vista, Microsoft Office and Windows Server in prior years, MSFT will face a more difficult year-over-year comp. Losses in its online services will accelerate as the company boosts investments. Risks include lower PC sales, further deterioration in the global economy and not achieving cost synergies from acquisitions.
Conclusion: MSFT earned one Star in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a net total of four Stars. This quantitatively ranks MSFT as a 4 Star-Buy.
Using my D4L-PreScreen.xls model, I determined the share price could increase to $21.03 and MSFT’s NPV MMA Diff. would still be around the $10,000 NPV MMA Diff. that I like to see. At that price the stock would yield 2.19%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the $10,000 NPV MMA Differential I’m looking for, the calculated rate is 15.8%. This dividend growth rate is only slightly below the 16.3% used in this analysis.
If I were interested in initiating a position in MSFT, I would look for a price below $21.03. Currently MSFT is trading above that level, so I would wait to buy on dips. Given its short dividend history, I would be unwilling to purchase shares at a premium.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I held no position in MSFT (0.0% of my Income Portfolio) .
What are your thoughts on MSFT?