When it comes to Microsoft (NASDAQ:MSFT), many investors still consider it a tech dinosaur. A throwback to the dotcom days when the internet was just getting started and PC sales were going through the roof. Tech is all about growth and the perception is that Mr. Softy represents the old school. There’s is no “M” in FANG, after all.
But that really is short sighted thinking. The reality is, MSFT still has plenty of growth left in the tank. Diving head first into some of tech’s hottest trends, Microsoft has continued to churn-out real earnings growth over the last few years. Moreover, that growth has translated into some pretty great dividend generation as well.
In the end, Mr. Softy could be the best combination of growth & income in the market today. The firm is no tech dinosaur and belongs in almost every portfolio.
MSFT’s Big Win in Satya Nadella
To be honest, that tech dinosaur probably was well deserved after the dot com days. During the mid-2000’s and through the recession, Mr. Softy seemed to struggle with finding new avenues for significantly increasing its revenues and profits. Zune, anyone? But all of that changed when it hired Satya Nadella as its CEO.
Sensing the decline in Microsoft’s traditional bread-n-butter PC operating system software, Nadella moved the firm into the sky. Cloud computing has become the big draw at MSFT and it’s exceeding even Microsoft’s expectations.
While Amazon (NASDAQ:AMZN) is the dominate player in the cloud and Google’s (NASDAQ:GOOG) Cloud Platform represents new competition, MSFT is by leaps and bounds the fastest growing. The latest quarter saw Mr. Softy see a huge 97% year-over-year increase in Azure cloud services revenues. This follows other 90%+ year over year jumps. Margins continue to be tight for the segment, but MSFT’s knowledge of selling products on volume and bundling/product integration continues to pay big time benefits. It’s easy to add Azure when most things are hosted on Windows anyway.
This has benefited the firm in terms of Infrastructure as a Service (IaaS) and Platform as a Service (PaaS) applications sales. New Productivity and Business Services segment application Microsoft 365 has already racked up some big customers in FedEx (NYSE:FDX) and Dow Chemical. The full migration of these larger customers is still in the early innings, and because of its capabilities, Microsoft has been quite successful at snagging them?
And MSFT has been pretty successful at getting retail customers into the cloud as well. Office 365- the Software as a Service (SaaS) version of its popular productivity suite- has seen subscriber counts grow by leaps and bounds. During the most recent quarter, Office 365 revenues increased by 22% year-over-year. That’s resulted in a steady stream of cash flows and revenues for Mr. Softy’s bottom line. Last quarter the division made $8 billion.
Nadella’s wins haven’t been just in the cloud. He pushed MSFT to buy business social media LinkedIn. That gave MSFT access to 433 million pro-business user’s data profiles that it can now mine, cross-sell and use. And those efforts are starting to pay off, LinkedIn contributed about a billion in revenues for them last quarter.
And when you add in the recent wins in its revamped hardware platform, cloud-based gains in gaming division and recent moves into AR/VR, MSFT is very much a growth oriented company these days.
MSFT Still Generates Plenty of Income
With that newfound sustainable growth has come an avalanche of cash flows. MSFT stock has quickly become dividend stalwart. Over the last ten years, Microsoft has increased its dividend by more than 300%.
But more dividend jumps could be on the horizon.
For starters, MSFT has about a $133 billion in cash on its balance sheet. That in of itself could lead to more dividends- especially if President Trump plans to allow repatriation of that cash at tax-free rates. That’s a huge amount of cash.
Even without Trump’s proposed tax holiday, continued gains in cloud computing and SaaS applications should feed its dividend. Right now free cash flows have historically come in about a third of its total revenues. Given revenue estimates for next year, free cash flows should come in around $27 to $36 billion. Keeping its payout ratio the same, that would result in an extra $2 to $3 billion for dividends.
That means MSFT’s 2.25% dividend could be higher very soon.
MSFT Has the Goods
In the end, Microsoft has thrown away the yoke of the dotcom with gusto. The firm is no longer a throwback to previous times. Cloud computing and its reoccurring revenues now power the show. For investors, that will only drive its dividends and share price higher. All in all, when it comes to the perfect growth and income stock pick, MSFT could be it.
Disclosure: None
