A few weeks ago I had a long conversation with a relative of mine, who already reached his retirement age. During this conversation he spoke of the time when there were no computers. Can you imagine, a life without computers? I certainly cannot. I remember my first computer, with the famous ms-dos operating system. Man, I spend hours on this thing. Playing simple games but most of the time just writing little programs. Or what about the Commodore game console? That brings back memories!
Nowadays a life without computers is unthinkable. The importance of computers will only be more and more in the (near) future.
This knowledge combined with the sector allocation of my Vrijheid Fonds, in which there are no information tech stocks, made me look at two big companies. IBM and Microsoft.
You all know that Warren Buffett is a huge fan, at this moment, of IBM. He purchased a lot of shares in the last year. And I read numerous blog post, from several fellow DGI’s, how they purchased shares of IBM lately. You can say that IBM is a hot DGI stock at this moment. IBM has had a massive buy back program in the last couple of years. I read that last year alone they purchased approx. 10% of their shares! So the EPS has been artificially raised. And I saw on Gurufocus that their debt is rising, and their cash is decreasing. In my humble opinion is this combination not a good omen for the future. I’m not saying it is a bad stock; it is just not a stock for me at this moment.
So that leaves me, at this moment, with only one company to look at.
This analysis is on Microsoft Corporation (MSFT).
Company (from google finance): Microsoft Corporation is engaged in developing, licensing and supporting a range of software products and services. The Company also designs and sells hardware, and delivers online advertising to the customers. The Company operates in five segments: Devices and Consumer (D&C) Licensing, D&C Hardware, D&C Other, Commercial Licensing, and Commercial Other. The Company’s products include operating systems for computing devices, servers, phones, and other intelligent devices; server applications for distributed computing environments; productivity applications; business solution applications; desktop and server management tools; software development tools; video games; and online advertising. It also offers cloud-based solutions that provide customers with software, services, and content over the Internet by way of shared computing resources located in centralized data centers. It provides consulting and product and solution support services.
Can I explain this to a 10-year old? What Does This Company Do?
This company made the operating system for your school computer (not at home, because daddy is a huge Apple fan 😉 ). This company also makes your XBOX.
Dividend Aristocrat: MSFT is paying Dividend for more than 13 years in a row. It is number 224 on the CCC-list from David Fish. And therefore it is not a Dividend Aristocrat, but a Dividend Contender. They are a three star stock on Morningstar.com. Because MSFT is only a Dividend Contender, it is a fail on the Pollie-code!
Dividend Yield > 2.5%: The dividend Yield of MSFT is 2.5%. This is above the industry average of 1.8%. And just a little bit lower than their 5 years average (2.6%). The Yield is above the requirements of the Pollie-Code, and therefore it passed the second Pollie-code.
Dividend payout <70%: The dividend payout is roughly 52%. This is below the maximum ratio. This also means that they can keep those dividend increases coming for a long time. Great! That’s what we DGI’s want. So also passed for this point.
DGR 1 year > 0%: Okay here comes the impressive piece! The dividend growth rate for 1, 3, 5 and 10 years are 18.6, 19.1, 17.2 and 21.8. With a 3-years DGR of around 19%. I think this is impressive! It is way above the requirements of the Pollie-code, so it is a pass.
P/E-ratio < 15: MSFT has a current P/E ratio is 19.8. And is way higher then their 5 years average (13.5). I couldn’t find an industry average. This metric is above the requirement of the Pollie-Code. Therefore this is a fail.
EPS > 0: The EPS is 2.41. So MSFT also passed the sixth Pollie-Code
ROE > 10%: Return on equity measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested. The current ROE is 22.1%. This is another pass.
Market Cap. > 100M: No problem at this point. The Market cap. is more than $ 393.477 Mil. You guested it already: Another pass.
Chowder Rule > 12: Named after “Seeking Alpha” member Chowder. This is a method of identifying candidates for purchase based on a combination of yield and (5-year) dividend growth rate. When the sum of these elements is above 12%, the company presents an attractive entry point (8% for utilities). When the figure is above 8%, an existing holding is still considered worthy of being retained. The current Chowder rule is 19.8. This is therefore of course a pass on the Pollie-code.
Stock price 52wk high-25%: The 52 wk. high and low are: 50.04 and 39.82. This means that MSFT will be in my buying zone when the stock price is below 47.46 ((50.04-39.82)*0,75 + 39.82). At this moment MSFT is trading for $47.46. Just spot on the price of the Pollie-Code. Therefore it is a pass on the Pollie-Code.
Beta: I think it’s important to have low Beta stocks in my portfolio. This helps to have a stable income all the time, even when the market has a rapid decline. The Beta for MSFT is 1.10.
Conclusion: When I look at the analysis, MSFT passed 8 out of 10 from the Pollie-code! The Pollie-code failed at the Dividend Aristocrat and the P/E-ratio. MSFT is a great stock, with lots of room to improve. If we look at the P/E ratio, MSFT is at this moment, priced higher than their 5-year average. But a company with a moat like MSFT has and their financial solid position makes it in my opinion a good addition to my Vrijheid Fonds. I have listed MSFT on my watch list for my Vrijheid Fonds.
What are you – the readers, thoughts on Microsoft? Which company do you prefer (IBM or MSFT), and why. Is MSFT a buy, do you own it?
Please comment on my analysis and thanks for stopping by!