Microsoft (NASDAQ: MSFT) stock has easily outpaced over the last 12 months the group of its five fellow tech giants that Wall Street lovingly named FAANG. Microsoft stock wasn’t left out of this group maliciously; many likely just assumed that its days of outsized growth were behind it.
This, however, is hardly that case, and MSFT stock appears to be one of the safest mega-cap tech buys out there at the moment, even at its new, all-time highs.
MSFT announced late Wednesday that it had raised its quarterly cash dividend and approved a new stock buyback program. The company lifted its dividend to 51 cents per share, which marked an 11% increase from its last quarterly payout of 46 cents. This is nothing earth-shattering because MSFT has raised its quarterly payout every year since it started paying a dividend back in 2004. But it does remind investors once again of the historic tech firm’s strength and stability.
The new payout, which will be payable on Dec. 12 to shareholders of record on November 21, marks a slightly larger increase than last year’s 9.5% boost from 42 cents to 46 cents. Meanwhile, MSFT’s board approved new buybacks of Microsoft stock of up to $40 billion.
Investors should note that this is the third time it has approved a repurchase plan of this scope. Overall, the firm said it bought back approximately $35.7 billion worth of MSFT stock between fiscal 2017 and 2019.
As we touched on at the beginning, the performance of Microsoft stock has surpassed all the so-called FAANG stocks over the last 12 months. The FAANG stocks are Facebook (NASDAQ: FB), Amazon (NASDAQ: AMZN), Apple (NASDAQ: AAPL), Netflix (NASDAQ: NFLX), and Alphabet’s (NASDAQ: GOOG). In fact, in the last year, FB stock is up just 14% compared to the 24% gain of Microsoft stock. MSFT stock price has outpaced AMZN over the last three years and has blown away Apple (chart above).
MSFT has inspired investors’ confidence through large buybacks and dividends, which it has been able to achieve thanks to its growing cash position. The company closed its most recent reported quarter with over $52 billion in net cash from operations. Yet perhaps what has been even more attractive to Wall Street is MSFT’s growth.
MSFT’s revenue popped 12% last quarter, with full-year sales up an impressive 14% for the second year in a row. More specifically, its Intelligent Cloud sales jumped 21% in fiscal 2019 and accounted for 31% of its total revenue. And importantly, MSFT has seriously expanded its cloud computing business in recent years to cement itself as industry-leader Amazon’s biggest challenger.
MSFT’s cloud unit has landed major clients such as Walmart (NYSE: WMT). And it could attract more and more firms that are loathe to help Amazon become a more potent potential competitor.
Microsoft is also ready to jump into the nascent cloud gaming industry. Meanwhile, the firm’s other businesses have performed well. MSFT’s Office and Windows units have evolved with the times and remain as important as ever. Meanwhile, some of its acquisitions, such as LinkedIn, have boosted the company. And its 2018 purchase of open-source software firm GitHub might prove to be another big winner.
Some might assume that the tech firm’s outsized climb over the last several years had pushed the valuation of MSFT stock way out of whack. Yet, that doesn’t appear to be the case.
MSFT stock is trading at 25.6 times the forward 12-month Zacks earnings estimates for MSFT. That valuation is far above the S&P 500’s average. But that is not a good barometer. Microsoft stock is trading below the average price–earnings multiple of its industry (27.9). The P/E multiple of its peer group stands at 27.4, also above the P/E ratio of MSFT stock. Plus, the P/E ratio of MSFT stock has been as high as 29.9 during the last three years.
The Bottom Line on Microsoft Stock
Looking ahead, our current Zacks Consensus Estimates call for Microsoft’s fiscal 2020 revenue to surge 11.1%, with 2021 projected to come in 10.5% higher than our current year estimate. On the bottom line, MSFT’s earnings are projected to climb 10.1% and 12.8%, respectively, in the next two years.
The company’s new projected annualized dividend of $2.04 per share puts its current yield at roughly 1.44%. Holding a Zacks Rank of #3 (Hold) at the moment, Microsoft stock has “A” grades for Growth and Momentum in our Style Scores system. Overall, MSFT stock looks like a stable tech stock to buy at the moment.
Some might want to wait for a small pullback from its new highs. But Microsoft stock has charged full steam ahead for years and it doesn’t look ready to stop now.
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