Linked here is a detailed quantitative analysis of Microsoft Corporation (MSFT). Below are some highlights from the above linked analysis:

Company Description: Microsoft is the world’s largest software company, develops PC software, including the Windows operating system and the Office application suite.

Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number

MSFT is trading at a discount to 1.), 2.) and 3.) above. The stock is trading at a 6.6% discount to its calculated fair value of $27.44. MSFT earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:

1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%

MSFT earned two Stars in this section for 1.) and 2.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. The company has paid a cash dividend to shareholders every year since 2003 and has increased its dividend payments for 8 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:

1. NPV MMA Diff.
2. Years to > MMA

The NPV MMA Diff. of the $1,707 is below the $2,700 target I look for in a stock that has increased dividends as long as MSFT has. If MSFT grows its dividend at 12.0% per year, it will take 5 years to equal a MMA yielding an estimated 20-year average rate of 3.9%.

Memberships and Peers: MSFT is a member of the S&P 500. The company’s peer group includes: Apple Inc. (AAPL) with a 0.0% yield, Hewlett-Packard Company (HPQ) with a 0.8% yield and Google Inc. (GOOG) with a 0.0% yield.

Conclusion: MSFT earned one Star in the Fair Value section, earned two Stars in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks MSFT as a 3 Star-Hold.

Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $21.60 before MSFT’s NPV MMA Differential increased to the $2,700 minimum that I look for in a stock with 8 years of consecutive dividend increases. At that price the stock would yield 2.96%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,700 NPV MMA Differential, the calculated rate is 13.6%. This dividend growth rate is slightly above the 12.0% used in this analysis, thus providing no margin of safety. MSFT has a risk rating of 1.50 which classifies it as a Low risk stock.

MSFT was one of the first large tech. companies to pay a dividend in 1990. Since then several other large tech. companies have followed suit, including Intel (INTC) in 1992, Oracle (ORCL) in 2009 and just this month Cisco (CSCO) announced its first dividend. MSFT has seen a slow recovery in IT spending, and suffered market share losses in smartphones and other mobile devices. The company’s free cash flow payout and debt to total capital is low, the combination of its yield, dividend growth rate and years of dividend growth fall short of my expectations. In addition, it failed to raise its dividend for 8 consecutive quarters between November 2008 and August 2010. For these reasons I will remain on the sidelines even though the stock is trading below by calculated fair value of $27.44. For additional information, including the stock’s dividend history, please refer to its data page.

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), but was long in INTC. See a list of all my income holdings here.

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In Jubak’s Journal, Jim Jubak believes the markets will recover before the larger economy does. He provides 5 picks for the beginning of the year and 5 for later, with lots of caveats. His 5 best stocks for the first half of 2009:

• Deere (DE) – a farm machine producer that tracks the price of agricultural commodities.
• Enbridge (ENB) – a natural-gas and oil pipeline company that has a 3.8% yield.
• ExxonMobil (XOM) – the world’s best integrated oil company for the current environment. [reviewed July 7, 2008]
• Flowserve (FLS) – It makes pumps and valves for moving everything from water to oil and has a yield of 2%.
• Rayonier (RYN) – a producer of wood products and an owner of timberland. Yield: 7.2%.

His 5 best stocks for the second half of 2009:

• Goldcorp (GG) – the world’s low-cost producer of gold.
• Google (GOOG) – the dominant Internet search company just gets more dominant.
• HSBC (HBC) – the best banking franchise left standing in Asia.
• Petrobras (PBR) – The Brazilian national oil company has dozens of new fields under development. It was added to Jubak’s Picks on Aug. 26, 2008.
• Thompson Creek Metals (TC) – the second-largest private producer of molybdenum in the world.

In their normal fun and frivolous way the Motley Fool picks The Best Stocks for the Year Ahead. Here are six of them:

• Yum! Brands (YUM) – a quick service restaurant with over 35,000 units in more than 100 countries and territories.
• PepsiCo (PEP) – a global snack and beverage company. [reviewed May 26, 2008]
• Coca-Cola (KO) – a manufacturer, distributor and marketer of nonalcoholic beverage concentrates and syrups. [reviewed October 22, 2008]
• Philip Morris International (PM) – an international tobacco company.
• Kinder Morgan Energy Partners (KMP) – a pipeline transportation ad energy storage company in North America.
• Enterprise Products Partners (EPD) – a North American midstream energy company.

Fortune magazine in their The best stocks for 2009 article points out the silver lining of the market meltdown: Equities are cheaper than they’ve been in years. They predict that these ten prospects will flourish during 2009:

• Altria (MO) – is the holding company of Philip Morris USA Inc. (PM USA) and John Middleton, Inc., which are engaged in the manufacture and sale of cigarettes and other tobacco products.
• Annaly (NLY) – a real estate investment trust (REIT) that owns and manages a portfolio of mortgage-backed securities.
• Dell (DELL) – a technology company, which offers a range of product categories, including desktop personal computer.
• Devon Energy (DVN) – an independent energy company engaged primarily in oil and gas exploration, development and production.
• Diamond Offshore (DO) – provides contract drilling services to the energy industry worldwide.
• Fluor (FLR) – a holding company that, through its subsidiaries, provides engineering, procurement and construction management.
• Johnson & Johnson (JNJ) – is engaged in the research and development, manufacture and sale of a range of products in the healthcare field. [reviewed October 29, 2008]
• Medco Health Solutions (MHS) – a pharmacy benefit manager.
• Pfizer (PFE) – a research-based, global pharmaceutical company. [reviewed March 17, 2008]
• Potash Corp. (POT) – an integrated fertilizer and related industrial and feed products company.

Finally, Selena Maranjian at the Motley Fool picks a single best stock in the article Best Stock for 2009: Johnson & Johnson. The article points out several important facts about JNJ:

• 75 consecutive years of sales increases.
• 24 consecutive years of adjusted earnings increases.
• 46 consecutive years of dividend increases.

In addition, the stock had a 10-year 140% total return for investors, compared to a 51% total return for the S&P 500.

We are all looking for the perfect stock. Over the years I have evaluated several of the above stocks as potential dividend investments, most did not pan out. Dividend investors are looking for stocks that will perform well over the long run, not just 2009. Of the stocks mentioned above, I am actively buying JNJ, KO and PEP.

Full Disclosure: Long JNJ, KO, PEP and PFE