Why You Still Need To Wait To Buy Microsoft (MSFT)

A month and a half ago, I showed you 4 Reasons To Buy Microsoft And 1 Not To

Today I tell you Why You Still Need To Wait To Buy Microsoft (MSFT) after it released its latest quarterly earnings. You can read the original article in full at the link above.

But if you don’t want to; here’s a quick recap of why I said you should avoid investing in Microsoft – for now.

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.

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.

Why 10%?

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.

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.

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.

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.

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.

Why?

Because the lower debt levels the company has, the lower chance it has of going bankrupt.  And this makes it a safer investment.

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… 

Conclusion

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.

***

This thesis to avoid Microsoft until it’s cheaper continued playing out after it released its most up to date quarterly earnings on October 27th, 2020.

  • Revenue rose 12% in the year to year quarterly period to $37.2 billion.
  • Operating income rose 25% in the year to year quarterly period to $15.9 billion.
  • And earnings per share rose 32% in the year to year quarterly period to $1.82 per share.

Since I last told you about Microsoft in early September its share price has continued to rise along with its profits.

Which means it’s still overvalued… Actually, even more so than the last time I told you about them.

Its P/E is now 37.

Its current P/CF is 27.

And its forward P/E is 32.4.

I look to buy companies with valuations below 20 on all these metrics to consider the company undervalued or at worst fairly valued…

Why below 20?

Because that means the company is at worst fairly valued… And if its significantly under 20 that means the company is undervalued.

When a stock is fairly valued or undervalued it gives you more margin of safety in investing terms.

This means you have a better chance of earning higher returns owning its stock over time.  And these things combined make it a less risky investment.

With Microsoft being overvalued it means there’s less margin of safety owning its stock.  This means you have a lower chance of earning high investment returns owning it going forward.  And these make it a riskier investment.

I’ll keep you updated on Microsoft in the coming months as needed… But for now, continue being patient and wait to buy its stock until it’s cheaper.

Click the links below to see the stocks we recommend to Depression Proof Your Portfolio and earn safe investment returns.

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.

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