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 discount to only 2.) above. When also considering the NPV MMA Differential, the stock is trading at a 151.4% premium to its calculated fair value of $176.42. 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 two Stars in this section for 1.) and 2.) 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% The company has paid a cash dividend to shareholders every year since 2003 and has increased its dividend payments for 23 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 negative NPV MMA Diff. means that on a NPV basis the dividend earnings from an investment in MSFT would be less than a similar amount invested in MMA earning a 20-year average rate of 3.75%. If MSFT grows its dividend at 10.0% per year, it will never equal a MMA yielding an estimated 20-year average rate of 3.75%.
Peers: The company's peer group includes: Apple Inc. (AAPL) with a 0.4% yield, Oracle Corp. (ORCL) with a 0.8% yield and Alphabet Inc. (GOOG) with a 0.4% yield.
Conclusion:MSFT did not earn any Stars in the Fair Value section, earned two Stars in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of two Stars. This quantitatively ranks MSFT as a 2-Star Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $123.85 before MSFT's NPV MMA Differential increased to the $1,200 minimum that I look for in a stock with 23 years of consecutive dividend increases. At that price the stock would yield 2.7%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $1,300 NPV MMA Differential, the calculated rate is 15.9%. This dividend growth rate is higher than the 10.0% 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 2023 with $111 billion in cash and short-term investments - nearly 5.5 times what was paid in dividends for the year. MSFT is trading at a significant premium to its calculated fair value price of $176.42. Due to price appreciation MSFT is my largest holding, at times exceeding 15% of my portfolio. With the market decline, I was able to take some losses and offset them with gains from MSFT in November 2022. As a result MSFT is still my largest holding, but now at 10.3%.
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 (10.3% of my Dividend Growth Portfolio).
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