Today, we’re looking at Dow Jones Industrial Average component Microsoft (NASDAQ:MSFT). I personally sold out of the stock more than 10 years ago, the day after it was declared a monopoly by the Department of Justice.

I recently took a peek at Microsoft’s offerings, and while they have expanded exponentially since then, MSFT really remains a software company to the core. And you’ve heard of just about everything it produces, mostly because when you buy a Microsoft product, you know it’s a Microsoft product — and not just because of the inconvenience caused by registering it.

The key driving factors regarding Microsoft are the economy and competition. The truth is, however, that because Microsoft’s operating system is so ubiquitous, the economy didn’t make an enormous dent in its net income. From July 1, 2008, to July 1, 2009, MSFT’s net income fell from $17.6 billion to $14.56 billion, then leaped back up to $18.76 billion and never looked back. Microsoft does see much-hyped competition from Apple (NASDAQ:AAPL), but in the grand scheme of things, it’s making do just fine. Microsoft’s other software applications are in the same situation. The company essentially still is a giant castle with a large moat around it.

Microsoft’s financials are practically perfect. The company just reported Q3 revenue up 7% over last year, net income of $5.74 billion (up 7%), diluted earnings of 68 cents per share (up 10%) and growth among virtually all of its divisions. The company carries $57 billion in cash and $11.9 billion in low-interest debt. Trailing 12-month cash flow was (I’m laughing as I write this)

$25.1 billion! That’s five times the amount of free cash flow necessary to pay its 3% dividend.

Conclusion

Stock analysts looking out five years on Microsoft see annualized earnings growth at 10%. MFST’s $5 per share in net cash gives it an effective stock price of $22, and on FY 2011 earnings of $2.85, the stock presently trades at a P/E of 7.7. I think Microsoft is deserving of an enormous premium. It is as close as you are likely to get to a safe stock that still has growth potential — and it pays a dividend. I would put an 11 P/E on it, which on projected 2015 earnings of $4.51 per share (factoring in the 3% compounded dividend yield reinvested), we get a price target of $50. That’s a great return from here.

• I believe MSFT is a buy for regular accounts.
• I believe MSFT is a buy for retirement accounts.

As of this writing, Lawrence Meyers did not own a position in any of the aforementioned stocks. Check out Meyers’ take on other Dow Jones stocks here.