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Microsoft Stock Takes Aim at $230

MSFT stock is worth between $222 and $240 per share based on expected earnings and dividend growth

Microsoft (NASDAQ:MSFT) has been on a tear since its March lows, joining other big tech stocks in the recovery. But there are plenty of reasons to believe that MSFT stock has further to fly.

Image of corporate building with Microsoft (MSFT) logo above the entrance.
Source: NYCStock / Shutterstock.com

I have been recommending Microsoft since April 8, when it was $165.13 per share. Since then, MSFT stock has risen to over $200 per share. And so far this year, MSFT stock has risen 34%. This is quite a remarkable performance during the coronavirus pandemic, when most stocks have actually fallen, or at best stayed flat, after dipping in Q1.

I believe that Microsoft will go from strength to strength in its earnings cash flow, and overall enterprise growth. This will push the stock even higher over the next year.

What Analyst Are Saying About Microsoft

Most analysts agree with me. For example, Yahoo! Finance‘s analyst poll estimates that earnings will rise by 19.6% to $5.68 per share for the year ending June 30, 2020, up from $4.75 last year.

Moreover, in 2021, they predict that Microsoft’s EPS will hit $6.23 for the year to June 2021. This represents a gain of 9.7%, despite the dampening effect of the novel coronavirus on economic activity.

Recently Seeking Alpha’s summary of Wall Street analyst reports showed “strong” channel checks and long term growth for the company. For example, RBC raised its target price to $240. They estimate double-digit growth in 2021 based on the company’s Azure cloud division growth and a new Xbox console launch.

Similarly, Baird increased its target price to $235, citing its expanding operating and free cash flow margins in the fiscal year 2022 ending July 2022.

MSFT Stock Dividend Is Secure

Microsoft expects to release its earnings for its FY ending June 30 on July 22. Analysts expect earnings per share of $1.38 per share for the quarter and $5.68. Microsoft recently declared its quarterly dividend of 51 cents per share on June 17.

Microsoft - Dividend History - MSFT Stock
Source: Mark R. Hake, CFA

You can see from the chart at the right that this recent quarterly is the fourth in a row at 51 cents per share. The chart shows that Microsoft usually raises the dividend every four quarters.

That means the next bump is likely to happen in September. Microsoft’s earnings will likely rise, as analysts project. Therefore, based on Microsoft’s history, I expect they will raise the dividend to 56 cents per share, or about 10% more.

So, based on this, the annual dividend is likely to be $2.24 per share, up 10% from $2.04 now. That gives MSFT stock a prospective dividend yield of 1.1%.

At its peak this year, Microsoft had a yield of 0.93%. That implies it could rise to $240.86 later this year when the dividend rises. This is calculated by dividing $2.24 per share by 0.93%. Expect MSFT to hit $240, just as the analysts predict.

What To Do With MSFT Stock

Barron’s recently wrote that Microsoft’s Q2 performance was “in style” and it now has a market value of over $1.5 trillion, just behind Apple’s. They pointed out that Microsoft’s Azure service division is the beneficiary of cloud computing adoption.

More Americans are gravitating to cloud computing based on work from home mandates. For example, Microsoft has slowly moved away from software packages to online services. It has shut most of its stores as a result.

Last quarter, earnings results were superlative and surprised analysts on the upside. I expect that the same will occur this quarter, especially in relation to the outlook in the near term. Long-term investors in the stock can expect it to rise over the next year.

For example, at today’s price-earnings ratio of 37 times (i.e., $202.88 divided by $5.68 estimated for the year ending June 2020), the stock could hit $230 this year. That is because analysts estimate EPS of $6.23 in 2021. Multiplying 36.7 times that EPS figure gives $222 per share. In addition, I have already shown that on a dividend yield basis, MSFT stock could peak at $240 per share.

So if you own Microsoft hang on to your shares. If you don’t you might consider taking advantage of any weakness in the stock at opportune times.

As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here.


Article printed from InvestorPlace Media, https://investorplace.com/2020/07/msft-stock-goes-from-strength-to-strength-with-earnings-and-dividend-growth/.

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