I should probably start this piece with a pretty hefty disclosure: I’m writing this piece on a brand-spanking new Microsoft (MSFT) Surface Pro using my subscription to Office 365.
Across the desk from me is another laptop running Windows. I have full-powered desktop PC back at the office running Windows. I even have Office installed on my Android smartphone. (And up until three months ago, I had a Windows Phone).
So, I’m pretty well “all in” when it comes to Microsoft products, and I might be a little biased here. But I can say with my best attempts at objectivity that I consider Microsoft stock the single best value in tech right now.
I’m currently long Microsoft stock both personally and in client accounts, and I expect it to be one of my best-performing positions over the next year or more.
Lest you think I’m some sort of kooky ideologue, I’m also long Apple (AAPL) and consider it a fantastic bargain as well.
But if you can only choose one, I’d recommend you go with MSFT.
The Strengths of Microsoft Stock
Microsoft is still in the early stages of a companywide transformation from a PC-based seller of software to a “platform-agnostic” seller of software and services primarily to businesses.
Apple fans know a thing or two about radical makeovers as well. Apple wasn’t always the king of high-end consumer electronics. Not that long ago, it was a struggling computer maker with an also-ran platform.
In his short time at the helm, MSFT CEO Satya Nadella has already managed to do things that would have been unthinkable in the Ballmer era. Rather than try to compete with his entrenched rivals in mobile, Nadella has embraced them and done everything in his power to get Office, Skype and OneDrive onto as many Alphabet (GOOG, GOOGL) Android and Apple iOS devices as possible.
On the cloud services front, MSFT is competing head-to-head with Alphabet and Amazon (AMZN), two worthy competitors indeed. But of the three, only Microsoft brings decades of experience in the enterprise space, and I expect Microsoft to really leverage those relationships in the quarters to come.
For patient, long-term investors, MSFT’s transformation means one thing: fatter dividends.
And that’s saying something, because the MSFT dividend is already one of the fattest in corporate America. Microsoft stock sports a dividend yield of 3.1%, making it one of the highest-yielding stocks in the S&P 500 outside of the utilities or REIT sectors.
Nadella and company hiked the MSFT dividend by 16% last quarter. But that’s really just par for the course. Over the past five years, Microsoft stock has grown its dividend at a 19% annual clip. And over the past ten years, MSFT has managed dividend growth of about 15% per year. If you had bought Microsoft stock ten years ago and held until today, you’d be enjoying an eye-popping dividend of over 10% on your original investment. Not too shabby!
Should we expect more dividend growth like this?
Well, I’m betting it will be pretty close. A decade ago, Microsoft was just initiating its dividend. Today, it’s starting with a dividend payout ratio of just over 80%.
But if that sounds high, fear not. Microsoft took a bath last quarter with an enormous write-off stemming from its decision to buy Nokia’s failing hardware business. Assuming that earnings per share rebound to more normal levels over the next year, Microsoft will pay out about half of its earnings as dividends.
Keeping the dividend growth rate at the levels of recent years will still mean that Microsoft will need to see some heady profit growth. But as Nadella’s transformation continues to unfold, I don’t see that being much of a problem.
Buy Microsoft stock and enjoy one of the great dividend growth stories of our lifetimes.
Charles Lewis Sizemore, CFA, is the chief investment officer of investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. As of this writing, he was long MSFT and AAPL.
More From InvestorPlace
- 7 Top-Rated Stocks Under $10
- Another Reason to Buy HP Stock for the Long Term
- 6 Consumer Staples You Should Already Be Buying