First Look at DOW 30 Component Microsoft (MSFT)

Bonds: $12.0 billion outstanding

Times interest earned: 78 times (MSFT earned $23.15 billion as of 6/2011 / $295 million interest expense).  That far exceeds Benjamin Graham’s recommendation of earning at least five times interest expenses.  Microsoft’s bonds do not threaten the dividend at all.


Preferred stock: none.

DIVIDEND RECORD: Microsoft started dividend payments in 2003 biannually and maintained that pattern until the start of 2005.  In Q1 2005 Microsoft started paying a quarterly dividend of $0.08 per share.  It has grown the dividend to $0.20 quarterly today.  That is 200% straight-line dividend growth over 7 years, or 28.5% annual growth per year.  That’s pretty impressive growth.

Dividend: $0.20

Dividend yield: 2.6% ($0.80 / $30.76 share price) Microsoft is a 6% high dividend stock at $13.33

Dividend payout: 29% using the Google Finance reported EPS of $2.75 –OR- 42% using the average adjusted earning power of $1.92


EARNING POWER: $1.92 @ 8.4 billion shares

(earnings adjusted for changes in capitalization – typically share buybacks and/or additional shares created)


Net income


Adjusted EPS



$12,254 M

10,906 M




$12,599 M

10,531 M




$14,065 M

9,886 M




$17,681 M

9,470 M




$14,569 M

8,996 M




$18,760 M

8,927 M




$23,150 M

8,593 M


Seven year average adjusted earnings per share is $1.92

Consider contrarian buying below $15.36 (8 times average adjusted EPS)

Consider value buying below $23.04 (12 times average adjusted EPS)

Microsoft (MSFT) is currently trading at 16.02 times average adjusted EPS.  This is stock is priced for investment.

Consider speculative selling above $38.04 (20 times average adjusted EPS)

BALANCE SHEET – Microsoft has a strong balance sheet.  The only problem is the high price to book value ratios.


Book value per share: $8.17 ($68.659 B equity / 8.4 B shares)

Price to book value ratio: 3.76 (under 1.0 is good) ($30.76 share price / $8.17 BV)  Investors are paying $3.76 for each $1.00 in book value.

Tangible book value per share: $5.50 (equity – $19.698 B goodwill – $2.756 B intangibles)

Price to tangible book value: 5.59 ($30.76 share price / $5.50 TBV)  19.03% of Microsoft’s assets are in intangibles which explains why the P/TBV increased so much.

Current ratio: 2.94 latest quarter (over 2.0 is good) ($76.86 B current assets / $26.17 B current liabilities)

Quick ratio: 2.27 latest quarter (over 1.0 is good) ($59.529 B cash and equivalent / $26.17 B current liabilities)

Debt to equity ratio: 0.17 (lower is better)

Percentage of total assets in plant, property, and equipment: 6.97% (the higher the better) Microsoft has massive current assets at 65.13% of total assets, intangibles were 19.03%, and other long term assets were 8.87%

Working capital trend: Up slightly in the long run.


CONCLUSION – As usual, the best time to buy MSFT in recent years was in March 2009 when the stock hit bottom at $15.28.  It was a contrarian buy then at just below 8 times average adjusted earning power.  Today the stock trades for double that price.  I think the stock is overpriced given the coming worldwide recession.  Microsoft is a steady dividend payer and grower.  The dividend yield is slightly above the S&P average of 2.2%.  The best part of Microsoft is their balance sheet.  The balance sheet is strong with the exception of their price to book value ratio and tangible book value ratio.  I would ignore this stock until it drops below the $23.04 value stock threshold.


DISCLOSURE – I don’t own Microsoft (MSFT).

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Published in: on July 5, 2012 at 10:54 am  Leave a Comment  

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