Tuesday, November 21, 2017

Microsoft Corporation (MSFT) Dividend Stock Analysis

Linked here is a detailed quantitative analysis of Microsoft Corporation (MSFT). Below are some highlights from the above linked analysis:

Company Description: Microsoft, the world's largest software company, develops PC software, including the Windows operating system and the Office application suite.

Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number

MSFT is trading at a premium to all four valuations above. When also considering the NPV MMA Differential, the stock is trading at a 84.3% premium to its calculated fair value of $44.72. MSFT did not earn any Stars in this section.

Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:

1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%

MSFT earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. MSFT earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 2003 and has increased its dividend payments for 16 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

1. NPV MMA Diff.
2. Years to > MMA

The NPV MMA Diff. of the $469 is below the $1,900 target I look for in a stock that has increased dividends as long as MSFT has. If MSFT grows its dividend at 7.7% per year, it will take 4 years to equal a MMA yielding an estimated 20-year average rate of 2.64%. MSFT earned a check for the Key Metric 'Years to >MMA' since its 4 years is less than the 5 year target.

Peers: The company's peer group includes: Apple Inc. (AAPL) with a 1.5% yield, Oracle Corp. (ORCL) with a 1.69% yield and Google Inc. (GOOG) with a 0.0% yield.

Conclusion: MSFT did not earn any Stars in the Fair Value section, earned three Stars in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks MSFT as a 3-Star Hold stock.

Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $46.99 before MSFT's NPV MMA Differential increased to the $1,900 minimum that I look for in a stock with 16 years of consecutive dividend increases. At that price the stock would yield 3.6%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $1,900 NPV MMA Differential, the calculated rate is 12.9%. This dividend growth rate is higher than the 7.7% used in this analysis, thus providing no margin of safety. MSFT has a risk rating of 1.75 which classifies it as a Medium risk stock.

MSFT in an enviably financial position. The company ended fiscal 2017 with $132 billion in cash and short-term investments - over 11 times what was paid in dividends for the year. MSFT is a buy below its calculated fair value price of $44.72. As such, I will continue to add to my position in the stock as market conditions and my allocation allows.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I was long in MSFT (7.3% of my Dividend Growth Portfolio). See a list of all my Dividend Growth Portfolio holdings here.

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Tags: MSFT, AAPL, ORCL, GOOG,

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