Redmond, Washington must be suffering from a bit of market shock right now. For the first time in eons Microsoft (MSFT) is feeling some investor love. The stock has rallied 7% since late last week when a better-than-expected earnings report landed. That was followed by Monday’s announcement that the ValueAct hedge fund had invested $2 billion in Microsoft. As reported by the Wall Street Journal ValueAct chief Jeffrey Ubben told an investor conference ““It is a dominant software company …and in the long term it will win out…Microsoft can flourish in the hybrid cloud world.”
Microsoft and buzz are not typically found in the same sentence. But as shown in the stock chart below, Microsoft shareholders have bragging rights on year-to-date performance, as the stock has outperformed other tech big boys including Google (GOOG).
A bunch of standout mutual fund value managers are probably staring at their Bloomberg terminals right about now and thinking “where have you been?” as they were actively adding to their Microsoft stakes in the first quarter (as well as previous quarters.)
The Yacktman Focused fund increased its Microsoft stake 35% in the first quarter; the stock now accounts for more than 6% of fund assets. Dodge & Cox Stock, a deep value fund, boosted its stake 15.4% in the first quarter, and the stock now accounts for nearly 3% of assets. Steven Romick, manager of the $11 billion FPA Crescent fund -- 9.8% annualized gain for the past 10 years, compared to 2% for the S&P 500 -- also bumped up his fund’s Microsoft stake early this year. At nearly three percent of assets, Microsoft is FPA Crescent’s third largest stock position.
While there’s much hand wringing over Microsoft’s ability to compete in a world where old-line software is no longer the hot growth market, the fact is, Microsoft is still selling enough stuff across an ever widening product platform that free cash flow has been growing at an impressive clip.
Over that same five year stretch, Microsoft has also reduced its shares outstanding by 10% while nearly doubling the dividend payout.
Microsoft’s 3.1% dividend yield is already a percentage point ahead of the market, but it’s net payout yield -- dividend plus the impact of share repurchases -- shows shareholders are getting an even higher return of capital: one direct and one indirect.
Even after the recent rally, the stock’s forward PE ratio is below 11. The tech sector within the S&P 500 has an average forward PE of 12.2 and the overall index trades at 14 times estimated 2013 earnings.
Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at firstname.lastname@example.org.
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