Why Financial Engineering Works for Microsoft Stock
Microsoft Corporation (NASDAQ:MSFT) stock is just bouncing off a new record-high, nearing where it was during the technology bubble of 2000. It’s a move that’s been a long time coming for the market’s “old” tech darling and MSFT stock has done very well of late.
Institutional investors like Microsoft’s dividends. Even though this is such a mature enterprise, the company is still able to grow its earnings per share (EPS), despite modest sales growth. This is a phenomenon we’ve been seeing for a number of years now: stalled corporate sales growth doesn’t prevent a stock from appreciating in value so long as EPS, dividends, or share repurchases are on the increase.
Perhaps it’s a reflection of the extreme monetary stimulus, but big investors have money to invest and what they really want is certainty. It’s been like this since the beginning of 2013, when earnings stability, and dividends to a lesser extent, is what big investors have been buying. Case in point: Microsoft stock has almost doubled in value over the last three years and the company’s dividend increases have been a big reason for it.
Microsoft’s stock chart is featured below:
Chart courtesy of www.StockCharts.com
What’s Driving MSFT Stock in a Slow-Growth World
Other than its dividends, the company’s been buying back a lot of its shares to pay for the dividends. In the three months ended September 30, 2015, Microsoft bought back 89 million of its own common shares. That’s about $4.0 billion worth, according to the company, around double what it was buying back in the same quarter last year.
As for sales, Microsoft’s sales to individual users were on the decline last quarter, while business conditions among corporate customers were basically flat. Total quarterly sales recently declined 12% compared to the same quarter last year, but what’s helping this stock is profitability. Even though sales have been on the decline, operating profits are still decent and diluted EPS in the most recent quarter improved six percent comparatively.
About five percent of Microsoft’s recent quarterly sales decline was due to unfavorable currency translation. This issue is not going away for multinationals, especially with rising interest rates on the horizon.
Microsoft stock is a bit pricey in terms of valuation, but the position seems to have pretty decent sentiment, with Wall Street earnings estimates on the rise and a mid-single-digit sales growth outlook for fiscal 2016.
This stock is investment-grade and more annual dividend increases are likely. All Microsoft has to do is keep the Street happy by beating expectations on at least one financial metric near-term.
The Bottom Line on MSFT Stock
While “Windows,” “Office,” and other related products have to eventually produce comparable sales gains or expose the position to vulnerability, at this time, Microsoft’s $100 billion in cash and marketable securities leaves MSFT stock well anchored.
Corporate financial engineering on top of good balance sheets has been enough for institutional investors to keep buying stocks over the last few years. Having said that, with the interest rate cycle about to change, beating the Street on only one financial metric may soon not be enough.