Microsoft Dividend Stock Analysis

 Every where I turn, I see an article condemning or praising Microsoft.  At 26.87, some say it is the dividend play of a lifetime.  Others feel it is a relic, a tech Goliath that has been beaten down by the likes of Apple and Google. 

I decided to take a look myself, so here is my analysis of Microsoft...



Microsoft (NASDAQ: MSFT) is engaged in developing, manufacturing, licensing and supporting a range of software products and services for different types of computing devices. 

Officially established on April 4, 1975 by Bill Gates and Paul Allen, Microsoft grew from a two man operation into a world-wide software giant.  MSFT operates in 5 business segments.

1. Windows and Windows Live Division- windows products and personal computers
2. Servers and Tools- SQL server, silverlight
3. Online Services- online advertising platform
4. Microsoft Business- office suite and desktop programs
5. Entertainment and Devices- Xbox, Zune

According to the most recent 10-k, Microsoft derived 58% of it's revenue from the USA, and the rest from it's world-wide operations.

Dividends, EPS,  Free Cash Flow

MSFT has managed to grow dividends, EPS, and FCF over the past decade, and all at an impressive rate.  EPS has grown by an average of 13.58% and FCF by 9.28%. 

The companies first dividend was paid in 2003.  In 2005 they issued a special, one time $3 per share dividend.  In the past 5 years, dividend growth has averaged 10.4%

Revenue and Margins

                     Revenue

2006	44282
2007	51122
2008	60420
2009	58437
2010	62484

 
MSFT has increased it's revenue by an average of 10.5% per year

Margins have all shown considerable stability, even at their high levels.  Gross margin has stayed near 80%, operating margin around 35%, and net margin around 26%.

Debt

  The balance sheet here is super clean.  Up until 2008, MSFT had no debt at all.  Even now, they have only taken on a very, very small amount.  Debt to total capital sits at a very reasonable 11.4%.

Current Ratio - 2.13

Returns

 Return on Equity and Cash Return on Total Capital are both trending upwards, and are very impressive.  ROE sits at a 10 year average of 27.35%, and Cash Return at 33.65%

Payout Ratios

 Excluding the one time $3 dividend, payout ratios are very low, leaving plenty of room for growth.   MSFT paid out 25% of 2010 earnings in dividends, and 21% of 2010 cash flow. 

Stock Price

MSFT has a share price of 26.84, with a trailing p/e of 12.78 and a forward p/e of 10.96.  The dividend yield, when calculated using the new 2011 dividend of .16 a share per quarter, is 2.38%.  This is below it's 5 year average low p/e and above it's 5 year average high yield. 

Conclusion

At this price, I think MSFT is a buy.  If not a buy, it is a least a strong watch. 

How do you feel about MSFT?

Full Disclosure:  I do not own any MSFT.  My portfolio holdings can be seen here