Shares of Microsoft (NASDAQ:MSFT) have provided investors with outstanding performance so far this year. In fact, MSFT stock is up nearly 40% this year. Microsoft is an appealing company for investors because the growth in its underlying businesses has allowed Microsoft to generate massive amounts of cash flows. Microsoft is a high-quality company because it generates a massive amount of cash, has phenomenal dividend growth and it is not in the anti-trust cross-hairs as many other large companies are.
With all of that in mind, let’s take a deeper look into each of these positive aspects that make Microsoft stock an appealing pick for any portfolio.
MSFT Cash Flows
There’s an old saying — “cash is king” — and I view MSFT as the king in that regard.
As of the end of the most recent quarter, Microsoft had over $130 billion in cash on its balance sheet. In addition, over the last four quarters, Microsoft has generated $38 billion in free cash flow. The substantial amount of cash on the balance sheet and cash generated by the business allows Microsoft to pay increasing dividends and invest in future growth areas. For example, Microsoft recently invested $1 billion in OpenAI and had another initiative to train 15,000 people in AI-related skills by 2022. This shows Microsoft is investing in what will be one of the most important technological areas in the coming decades.
Stellar Dividend
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The dividend for Microsoft is one of the safest if not the safest dividends in the market. The reason for this is the large amount of cash on the balance sheet, cash flow generation and the fact Microsoft is one of only two AAA rated companies. Going forward, I expect that Microsoft will continue to increase their dividend at a rate of 8-10% per year, with the next increase likely announced in mid-September.
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Even with the stellar dividend and stable dividend-growth, the dividend yield for MSFT stock is only 1.31%. The reason for the low dividend is that the stock has moved up in price so much this year. The following chart shows the dividend yield for Microsoft is at a historically low level. I expect that when Microsoft announces a dividend increase in September, it will be a quarterly dividend around 50 cents per share.
Since the beginning of 2018, the dividend yield has ranged from 2% to the current 1.30%. If Microsoft were to return to the mid-point of that range at a yield of 1.65% with a potential quarterly dividend of 50 cents per share, that would imply a stock price of around $121. I believe a pullback would be healthy for the stock and create an opportunity for potential investors.
Microsoft Eludes Current Anti-Trust Troubles
Even though Microsoft has a $1 trillion market cap, they were left off the list of companies that are coming under scrutiny from Washington D.C. Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) are all in the cross-hairs for various reasons.
Since Microsoft is not in the cross-hairs, it makes MSFT stock a compelling pick to consider. For example, if the regulators/anti-trust authorities have a problem with one of those four companies and an investor sells out of their position, investors are likely to strongly consider moving those funds to Microsoft to maintain their large-cap technology exposure.
Bottom Line on MSFT Stock
The bottom line is that Microsoft is a high quality company that generates massive amounts of cash, has superior shareholder returns and as of right now, is not in the anti-trust cross-hairs. The one drawback for Microsoft stock is its price, shares are expensive and, as I noted the above, the dividend yield is toward the low end of its historical range, which means waiting for a better entry point may be warranted.
As of this writing, Brad Kenagy did not hold a position in any of the aforementioned securities.
