How Can No Growth Actually Move a Stock to a New High?
Overall, investment quality remains a very important attribute and you’re going to get it with Microsoft Corporation (NYSE:MSFT) stock.
Really, we’re still in an equity market that is trying to balance itself out after years of Fed-induced capital gains. This year and next could very well not provide capital gains in the main market indices.
And this is why quality, earnings predictability and yield are of major importance. Calling Microsoft a safer play would be the right characterization, but even if the market were to suddenly rally, boring “old tech” names like Microsoft would move commensurately.
This is going to be another year in which a strong portfolio defense is the name of the game. Global economic growth among mature economies remains anemic. It is a new interest rate cycle and quite frankly, I believe more price inflation is on the horizon, which will soon put increasing pressure on rates.
Accordingly, an existing blue-chip winner like MSFT stock offers quite a bit. At the very least, we know that institutional investors like the position or else they wouldn’t be bidding it.
Microsoft currently is not growing. So why then is the stock trading right near its all-time high?
For one thing, Microsoft’s story is all about perception. Institutional investors know that Microsoft isn’t growing its sales and earnings now, but this is expected to change in the company’s next fiscal year, as it continues to move operations to the cloud.
Further to this, what Microsoft is doing now is increasing its dividends paid to stockholders and buying back more of its own shares. In a slow-growth environment, this is enough for big investors to keep holding a position offering earnings predictability, even if the company’s actual business growth is less than robust.
The chart for MSFT stock is featured below:
Chart courtesy of www.StockCharts.com
Microsoft spent about $6.5 billion in dividends and share repurchases in its latest quarter (ended December 31, 2015).
After the company’s latest earnings report, Wall Street upgraded the company’s go-forward earnings outlook across the board for upcoming periods.
When the broader market corrected at the beginning of this year, Microsoft stock only did so minimally. This in itself is a telling trait and it highlights a very important portfolio consideration for a slow-growth world.
Institutional investors, the only driver of large-cap share prices, want certainty. This includes the ability of a publicly traded company to produce sales and earnings results close to what the Street is expecting—i.e. no surprises.
In addition, big investors want dividends and they want good prospects of increasing dividends in upcoming periods.
Microsoft may not be growing right now, but its cash position and net cash from operations continue to swell. This provides a lot of ammunition for the company to keep shareholders happy as Microsoft transitions its business to strategies able to provide real comparable growth.
A stock’s trading action, especially in a flat market, is a very important revealer. Obviously, past performance can’t predict future action in a stock, but a position trading right close to its recent high when the broader market isn’t signals what the marketplace is willing to pay for.
And that, in publicly traded capital markets, is just as important as the underlying business conditions for an enterprise.
I like MSFT stock for its blue-chip earnings predictability and its solid dividend.