Microsoft Expecting Its Strongest Quarter

Microsoft Expecting Its Strongest QuarterOne company that is consistently seeing its earnings estimates tick higher is Microsoft Corporation (MSFT). The stock has basically doubled since the stock market breakout at the beginning of 2013, and the company has been increasing its dividends significantly.

Microsoft’s current quarterly dividend, payable in early December, is $0.31 a share, representing an 11% gain over the previous quarterly dividend.

The company’s revenues still have a lot of momentum. In its most recent quarter (ended September 30, 2014), Microsoft saw total sales grow to $23.2 billion, up materially from $18.5 billion in the same quarter last year.

And management is buying back a lot of its own shares: approximately $7.0 billion from September 2013 to September 2014, with $33.0 billion left under the current authorization.

Notable in the company’s most recent quarter was a strong increase in sales of computing and gaming hardware. Total sales in this specific segment improved 74% to $2.5 billion over the comparable quarter last year.

In April of this year, the company bought Nokia Corporation’s (NOK) device and services business for $9.4 billion. Right after the acquisition, Microsoft announced a new restructuring plan, which includes the elimination of 18,000 positions this fiscal year. Approximately 12,500 of the job losses are in professional and factory production jobs related to the Nokia business.

Microsoft has a tremendous amount of cash on its books, with $89.2 billion as of September 30, 2014. Like so many other large corporations, Microsoft keeps most of its cash ($83.4 billion) in foreign-held subsidiaries. Repatriating the cash would have severe tax consequences for the company.

Microsoft’s share price has been going up consistently as of late. (See “Large-Cap Tech Doubling in Price and Headed Higher.”) The company’s stock market capitalization just rivaled Exxon Mobil Corporation (XOM) and is now the market’s second most valuable company behind Apple Inc. (AAPL).

As an investment, I think Microsoft is going to keep its share price momentum right into 2015.

The stock is attractive with a 2.5% dividend yield; it has strong earnings growth expectations with diversified business lines selling to both commercial and individual customers.

Excluding the revenue gain from the Nokia acquisition, Microsoft is still growing its business at a double-digit rate, and the stock isn’t too expensively priced.

In the three months ended September 30, 2014, the company bought back 43 million of its own shares. The company’s management team has given no indication that they plan to stop the share purchases.

Investment Strategies for Playing a Stock Like Microsoft

I view a Microsoft investment as a more defensive play for equity investors wanting to buy this market. I like existing winners among dividend-paying blue chips, especially in a slow-growth environment.

And I really like dividend income for investors (and dividend reinvestment in shares), particularly when the broader stock market is at a record-high. Microsoft could be a good candidate for dividend reinvestment for those investors who don’t require the quarterly income.

Microsoft’s business is typically seasonal. The company’s current quarter, its second fiscal quarter of 2015, is expected to be its strongest.