Why Big Investors Want Microsoft Stock
Microsoft Corporation (NASDAQ:MSFT) stock has been doing great lately and it’s not because software or hardware sales are taking off; it’s because the company offers something few big stocks can: relative earnings stability.
Investment risk is going up in a rising rate environment and institutional investors want certainty. So even if a company isn’t able to beat the Street on both sales and earnings, I believe one financial metric is still enough for the Street to keep bidding stocks.
Microsoft stock is looking pricey these days, but the position will likely remain this way so long as earnings expectations continue to call for low-double-digit growth on a comparative basis. The company doesn’t report its next set of financials until the end of January.
Microsoft’s recent quarter (the first fiscal quarter of 2016) produced lackluster sales, but earnings-per-share (EPS) growth was solid and enough for this market. With a strong share repurchase program and the high likelihood of yet another dividend increase in fiscal 2017 (current dividends are $0.36 per quarter; they were $0.31 per quarter in fiscal 2015, $0.28 per quarter in fiscal 2014, and $0.23 per quarter in fiscal 2013), I think MSFT stock is going to outperform the broader market next year.
The company’s five-year stock chart is featured below:
Chart courtesy of www.StockCharts.com
What Does the Street Expect from Microsoft?
Basically, the Street expects flat comparable sales this fiscal year with a low-double-digit improvement in EPS from Microsoft.
So far, Wall Street’s current outlook for Microsoft’s next fiscal year calls for a mid-single-digit improvement in total sales, followed by another year of double-digit EPS growth. If this transpires, combined with solid dividend growth, it should be enough to keep investors bidding this stock in a slow-growth world.
Just like when the stock market took off at the beginning of 2013, the market’s most trusted earnings and dividend payers (stocks like Johnson & Johnson and 3M Company, for example) were the leaders as institutional investors wanted relative earnings certainty above anything else.
Speaking of outlooks, I’ve noticed countless large-cap, brand-name companies forecasting solid sales and earnings growth over calendar 2015, even with the stronger U.S. dollar. Although the Federal Reserve is the arbiter of sentiment in capital markets, corporate reporting and outlooks are the bedrock of the equity market and perhaps the most useful tool in determining a market forecast. With a new interest rate cycle on the horizon, I see the market in 2016 developing similarly to this year’s performance: generally speaking, flat equity market conditions with a stronger U.S. dollar being a mild hindrance on corporate results. Market leadership should continue to come from large-cap tech stocks, including Microsoft.
With very modest (if any) sales and earnings growth from large corporations in 2015, any comparable growth in 2016 should be well received by institutional investors, even though the stock market already went up in anticipation.
While business conditions continue to be lackluster on a global basis, there is still plenty of institutional money that will buy stocks beating expectations on only one financial metric. As such, Microsoft should continue to be a market leader in 2016. Double-digit EPS growth, on its own, is enough for big investors to keep bidding MSFT stock.