Microsoft (NASDAQ:MSFT) has been very strong during the pandemic. Based on factors including cash flows and continued growth in core businesses, it’s logical that MSFT stock has performed pretty well.
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Still, the company recently suffered a few setbacks. The recent market correction took shares from $230 down to near $200 in the span of a week. So while most spectators remain bullish on the company in the long term, trepidation is still there.
Investors want to know if further corrections will pull shares down again. CEO Satya Nadella has presided over a period in which MSFT stock has risen several fold. His tenure has been nothing short of stellar from that perspective.
Although the company’s recent failure to acquire TikTok will only fuel negative speculation, these minor setbacks don’t make Microsoft a sell by any means.
TikTok and MSFT Stock
Microsoft has been bold in its acquisition strategy under Satya Nadella. The company purchased LinkedIn, GitHub, and Mojang AB which owns the game “Minecraft” during Nadella’s tenure.
TikTok has instead chosen to partner with Oracle (NYSE:ORCL). It could be argued that this is a loss simply because Microsoft’s competitor won out contract negotiations. Yet, some Microsoft owners see upside to the conclusion.
“I’m actually relieved that they didn’t win it,” said Jensen Investment Management portfolio manager Kevin Walkush. “I think it would have added complexity to the business.”
Jensen Investment Management controls 4 million MSFT shares.
MSFT Stock Dividend Increase
Microsoft just announced that it will increase its dividend to 56 cents. The dividend will be paid on Dec. 10, and represents a 10% increase over its prior payment.
The company has undertaken a continuous dividend increase since 2004. The increased dividend should serve to pull more conservative investment capital into the company. This should be a net positive as blind investment into all things tech goes on pause.
Investors who feel Microsoft, and tech at large, are overpriced and due for a greater correction can breathe a bit easier. Again, the more Microsoft can play up this aspect of MSFT stock, the better.
However, as with all things in business, there is a fine line to tread. An over-reliance on dividends signals stagnation to many in the stock markets. Payouts themselves necessarily divert money from potential growth investment.
But perhaps Microsoft will increase its dividend yield in coming quarters. There is certainly room to do so with a trailing and forward dividend yield of 0.99%, and a modest dividend payout ratio of 0.35.
Let’s take a look at some comparable companies to try and get a feel for where Microsoft should trade relative to its peers. The first step in doing so is to determine which firms are truly comparable to Microsoft. Apple (NASDAQ:AAPL) and Cisco (NASDAQ:CSCO) are often compared to Microsoft. So I’ll use them.
The point here is not that Microsoft should be viewed purely through the lens of value investing. Rather, the point is to apply other perspectives to a stock that has grown quickly but may face a pullback.
If a cooling of the markets recurs, investors may apply value investing principles to the tech sector. In that case, investors should know where capital may flow.
Since Apple and Cisco are in the same industry, we can use P/E ratio for comparison’s sake. Using this very simplistic model we find that P/E ratios of 35.66, 34.1, and 15.37 for Apple, Microsoft and Cisco, respectively.
This shouldn’t surprise readers: investors are much more willing to pay for a piece of AAPL or MSFT earnings than CSCO. Yet, perhaps it is time to at least consider sifting through the tech sector wholesale, and applying value principles. It could be a worthwhile exercise.
Verdict on MSFT
Microsoft is a great company. Shares have been champions for years. The company’s Azure cloud services, government contracts, acquisition strategy and position in a changing work environment give owners plenty to look forward to. I agree with markets that it is a buy.
Yet, I also believe that investors should exercise caution and prudent fundamental analysis. This is doubly true in tech where herd mentality is strong.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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