4 Reasons To Buy Microsoft
With new cases of the coronavirus spiking in the US and worldwide.
With the already historic unemployment levels and job losses in recent months.
And with many Blue Chip stocks looking vulnerable when they’re supposed to be among the best areas to invest your capital.
There are few safe places to invest your capital today. And this number is growing smaller every day this crisis lasts.
The key to continue compounding your investments and build wealth is to keep investing well over time.
Most people think the number one way to do that is to invest in assets that will grow your capital over time.
And this is huge part of things.
But another huge part of this is also losing as little capital as possible.
The fewer investment losses you have the more capital you keep. And the more capital you keep the faster you can invest well to grow your wealth.
In recent articles I’ve shown you several stocks to avoid investing in…
- 1 More Reason To Avoid Burlington Stores
- 2 Reasons To Avoid Home Depot
- 3 Reasons To Avoid Target
- 2 Reasons To Avoid Lowe’s
- 5 Reasons To Avoid Hilton
- 1 Reason To Avoid Tesla
- 2 Reasons To Avoid Netflix
- 2 Reasons To Avoid GM
- 2 Reasons To Avoid Nike
- 2 Reasons To Avoid Starbucks
Today, I want to show you 4 Reasons To Buy Microsoft – And 1 Not To.
Microsoft (MSFT) is one of the world’s largest software companies… And as of this writing is the world’s 3rd largest overall company by market cap behind only Apple and Amazon.
The company has 3 major divisions it breaks into…
- Productivity and Business Processes – This division includes Microsoft Office, Skype, and LinkedIn among others.
- Intelligence Cloud – This division includes Azure and Windows Server OS among others.
- Personal Computing – This division includes Windows Client, Bing, and Xbox among others.
In other words, Microsoft helps keep the world connected via LinkedIn, Skype, Xbox and others… While also helping run our devices and the internet.
Microsoft is based in Redmond Washington. It has a $1.62 trillion market. And it also pays a 1% dividend.
This is reason #1 to buy Microsoft to Depression Proof Your Portfolio.
Microsoft’s 1% Dividend
Over the last decade Microsoft’s paid out a total of $12.90 per share in dividends.
At today’s share count of 7.683 billion shares that’s equal to $99.11 billion paid out to shareholders in the last decade.
Plus, in the last decade it grew its dividend 226% from $0.61 per share in 2010 to $1.99 per share now. This is an annual dividend growth rate on average of 22.6% per year.
These dividend payments will help you in normal times earn cash if you take the money out. Or allow you to buy more shares over time if you reinvest the dividends.
These regular payments will help you earn more money for your retirement. And the solid, stable, and growing dividends will help in any kind of prolonged economic issues like we’re dealing with today.
It can do this because it earns huge profits and cash flows. Which is reason #2 to buy Microsoft to Depression Proof Your Portfolio.
Microsoft Earns Huge Profits
Over the last decade it earned an average operating income margin of 32.6% per year.
I look for anything above 10% on a consistent basis so MSFT surpasses this number.
Because after evaluating thousands of companies over the last 13+ years of my career I estimate fewer than 5% of all companies in the world produce consistent operation profit margins above 10% over long periods of time.
This makes Microsoft a great operating business.
But it also means the company earns enough money from its operations to continue investing in the business for growth… Without having to issue debt or equity.
Another way to show this is with its free cash flow to sales ratio (FCF/Sales). Over the last decade its 31.7% per year on average.
I call this the “Cash Machine” metric.
I look for anything above 5% on a consistent basis for the same reasons as I look for high operating profit margins above.
If companies are consistently above 5% on this number, it makes the company a cash machine that spits out more and more cash from its operations.
Microsoft surpasses my thresholds on both important metrics and that makes it an incredibly safe investment.
These profits also allow it to continually reinvest in operations. And to pay you a large and growing dividend as well.
Its large profits and cash flow and growing dividend payments over time make Microsoft a safe income play in whatever is to come in the next few months or years.
But these profits also allow another layer of safety because Microsoft’s business is largely protected from negative effects of the coronavirus… Which is reason #3 to buy its stock.
The Coronavirus Won’t Harm Microsoft
People may stop paying their mortgages.
They may stop paying their credit cards.
They may stop paying their vehicle loans.
And they may stop paying their student loans.
Because of the mass unemployment caused economic issues we’re now dealing with people may stop paying these things if they need to.
But people and businesses won’t stop using Microsoft’s products and services to work and do everyday tasks.
This was illustrated when MSFT released its most recent quarterly report on July 22nd, 2020.
- Revenue grew 13% from $33.1 billion in the 2nd quarter of 2019 to $38 billion in the 2nd quarter of 2020.
- And operating profits grew 8% from $12.3 billion in 2nd quarter of 2019 to $13.4 billion in the 2nd quarter of 2020.
These impressive results were achieved while many other companies’ revenues, profits, and cash flows are getting crushed by the coronavirus.
This shows the power of the company and its ability to survive and thrive during this pandemic… No matter how long it lasts.
It gives enormous stability to the company in these highly uncertain times. And it also means you should expect Microsoft to continue earning enormous profits and cash flows.
And this means you should expect the large dividend payments to continue as well.
But what do these profits and cash flows mean for Microsoft’s debt levels?
Microsoft Has Low Debt
As of this writing its debt to equity ratio is 0.57.
I look to buy companies that have a debt to equity below 1.
Because the lower debt levels the company has, the lower chance it has of going bankrupt. And this makes it a safer investment.
Generally, the more profits and cash flow the company produces the higher its debt levels can be without becoming problematic.
The key words being can be above.
And its total liabilities as a percentage of its balance sheet is only 60.7%.
Because of Microsoft’s continued fantastic profits and cash flow its able to have ultra-low debt levels. And this makes investing in its stock even safer.
But what about its valuation? Is it cheap?
Microsoft IS NOT Cheap
This is the only reason to avoid its stock…
With the markets at or near all-time highs you’d expect a fantastic stock like Microsoft to be selling at an enormous valuation.
And it is.
As of this writing its P/E is 29.8.
Its P/CF is 27.1.
And its forward P/E is 32.8.
On all three metrics I look to buy investments below 20 to consider them undervalued.
This means, at its current valuations that Microsoft is overvalued by a large amount.
And this means investing in its stock today gives you no margin of safety in investing terminology.
When you invest in stocks that have a margin of safety it makes the investment safer. And it also means you should expect to earn higher returns owning its stock in the coming years.
The inverse of this is also true…
When you invest in a stock without a margin of safety it makes the investment riskier. And it also means you should expect to earn less owning its stock going forward.
Usually great stocks like Microsoft rarely sell at undervalued prices, but you should wait to buy it until it is… Or at the least wait until it’s cheaper.
If you’re looking for a solid, safe, stable, dividend paying, cheap, and enormously profitable investment to Depression Proof Your Portfolio – consider investing in Microsoft. But only when it’s cheaper.
Click here to see some of the other stocks we recommend to Depression Proof Your Portfolio.
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.