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 17.3% discount to its calculated fair value of $79.39. MSFT earned a Star in this section since it is trading at a fair value.
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 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. MSFT earned a Star for having an acceptable score in at least two of the four Key Metrics measured.
Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (2007-2010, 2008-2011, 2009-2012, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 2003 and has increased its dividend payments for 15 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
MSFT earned a Star in this section for its NPV MMA Diff. of the $4,774. This amount is in excess of the $2,000 target I look for in a stock that has increased dividends as long as MSFT has. If MSFT grows its dividend at 15.0% per year, it will take 1 years to equal a MMA yielding an estimated 20-year average rate of 2.71%. MSFT earned a check for the Key Metric 'Years to >MMA' since its 1 years is less than the 5 year target.
Peers: The company's peer group includes: Apple Inc. (AAPL) with a 1.6% yield, Oracle Corp. (ORCL) with a 1.7% yield and Google Inc. (GOOG) with a 0.0% yield.
Conclusion: MSFT earned one Star in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of four Stars. This quantitatively ranks MSFT as a 4-Star Strong stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $94.56 before MSFT's NPV MMA Differential decreased to the $2,000 minimum that I look for in a stock with 15 years of consecutive dividend increases. At that price the stock would yield 1.7%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,000 NPV MMA Differential, the calculated rate is 11.8%. This dividend growth rate is lower than the 15.0% used in this analysis, thus providing a significant margin of safety. MSFT has a risk rating of 1.75 which classifies it as a Medium risk stock.
With strong free cash flow and very low debt, MSFT in an enviably financial position. Not to be overlooked, the company ended fiscal 2016 with $113.2 billion in cash and short-term investments - over 10 times what was paid in dividends for the year. MSFT is a buy below its calculated fair value price of $79.39. 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 (6.2% of my Dividend Growth Portfolio). See a list of all my Dividend Growth Portfolio holdings here.
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