5 Reasons to Buy Microsoft Now

By Michael Meyer - January 13, 2013 | Tickers: AMZN, AAPL, GOOG, IBM, MSFT, ORCL, SAP, VMW | 0 Comments

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Microsoft (NASDAQ: MSFT) has long been thought of as a company that has already reached its peak.  With extremely low volatility levels and stable price moves, I can understand why investors may not be overly excited about investing in the company.  And while investors may no longer see doubles and triples in the stock price, Microsoft should still be considered as part of a diversified portfolio. Below are five reasons why you should consider adding a position in Microsoft.

Reason #1 - Cheap Valuation

Microsoft is trading very close to its 52 week low.  This is due to a couple of reasons but mostly because of a poor earnings report for the 2013 first quarter.  The company disappointed against what the analysts were expecting.  Microsoft reported revenues of $16.01 billion while analysts had been expecting $16.42 billion.  Additionally, the EPS came in at $0.53, which was 3 cents light of what the Street projected.

One thought as to why the company struggled is that since they were on the verge of releasing Windows 8 and a few other products, such as their new tablet device called Surface, consumers were holding off on purchasing old products in anticipation of the new products.  I think this is a very viable explanation and should get investors excited about the potential in the upcoming earnings report.

Additionally, while the company did miss on the overall numbers, there were signs of growth in a few key areas.  First, the online services division grew by 9%.  And secondly, the important servers and tools division grew by 8%.

Reason #2 - Upcoming Catalyst

Microsoft is scheduled to report their second quarter earnings on Jan. 24, after the market closes.  This will be an exciting time for investors as they eagerly wait to see whether the explanations given for a poor first quarter hold water.  This report will have some interesting details about several of Microsoft's key products, such as Windows 8 and Surface sales numbers.  Microsoft has spent a great deal of money on marketing campaigns for these products so it is critical for that investment to show signs of paying off, especially with the stock trading near a 52 week low.

Reason #3 - Growth Projections

Analysts are currently expecting earnings to be $2.88 per share in 2013 and $3.22 per share in 2014.  This translates to growth rates of roughly 4% for 2013 and just under 12% for 2014.  For a company of Microsoft's size and mature status, those are excellent growth rates.  I also think that due to Microsoft's weakness in the first quarter, these projections may be understated.  I do not think they are accounting for the fact that more people than expected may have been holding out for Microsoft's new line of products.

Reason #4 - Future Dividend Increases

Microsoft recently increased their dividend by 15% during September of last year.  So the new dividend that investors will receive is 23 cents per quarter, or 92 cents per year.  So based on Microsoft's current price, this translates to an almost 3.5% dividend yield.  This is a very attractive bonus for investors who think the share price is already ripe for a large increase.  Now what is interesting about this dividend amount is that Microsoft has been reducing their outstanding shares over the past few years.  As a company's shares decrease, the dividend amount tends to increase because there is more money being spread across fewer shares.  Additionally, in 2006, the company's dividend was only 8 cents.  Since that time, it has almost tripled to 23 cents.  It is perfectly reasonable to expect future increases, although maybe not to that extent.

It is important to put Microsoft's dividend in context with some of its closest competitors.  You will find that Microsoft is superior when it comes to dividends and valuation.  Four of Microsoft's largest software rivals are Oracle (NASDAQ: ORCL), SAP AG (NYSE: SAP), VMware (NYSE: VMW), and International Business Machines (NYSE: IBM).  Each of these companies fails in comparison to Microsoft's dividend.  Oracle only has a 0.70% dividend yield, SAP only has a 0.80% dividend yield, IBM only has a 1.70% dividend yield, while VMW doesn't pay a dividend at all.  Now of course there are more aspects to a company than just a dividend, but when you compare Microsoft's cheap valuation and rich dividend, the pieces do start to add up to a potential smart investment.

Additionally, with the exception of IBM, which has a PE ratio of 13.98, all of the other competitors listed above have a PE ratio higher than that of Microsoft. While Microsoft only has a PE ratio of 14.50, Oracle has a PE ratio of 16.39, SAP has a PE ratio of 25.75, and VMW has a staggering PE ratio of 55.92.  When you combine Microsoft's attractive dividend yield, PE ratio, and growth projections, the company does appear to be in better shape than the four competitors listed above.

Reason #5 - Surface Tablet Innovation

Microsoft is banking a lot of its hope on its new tablet device called Surface.  This product launched on Oct. 26, 2012, and the upcoming earnings report will have details regarding initial sales and future projections of the device.  While the product does carry an expensive price tag of $699, Microsoft executives and analysts are optimistic mostly because of the device's power.  It will feature Microsoft's new operating system, Windows 8, which has already received many positive reviews.

Microsoft's new device will square off against competing products from Apple, Google, and Amazon. Each of these companies has experience and has developed several versions of their tablet over the years.  Within this group, Apple is clearly the dominant player with its iPad mini and iPad 4.  Google has its Nexus 10 and Amazon has its Kindle.  It will be interesting to see what kind of dent Microsoft can make in this space to challenge these technology innovation powerhouses.  One thing is clear, though, Microsoft is going to continue pushing the envelope and is not content to let these other companies gain market share without a challenge.  This should give investors a lot of hope.

Conclusion

The five reasons laid out above should give investors a lot of hope regarding the future of Microsoft.  Although the company hasn't performed as well as investors may have hoped over the past few years, they continue to innovate and find new ways to penetrate new markets in the consumer tech space.  I expect the next earnings report to be very solid for Microsoft and lay the foundation for future growth.

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