Microsoft Corporation Stock Analysis – Recently Added to the FFJ Portfolio

(Last Updated On: September 21, 2017)

Summary

  • After completing this Microsoft Corporation stock analysis I decided to purchase shares for the FFJ Portfolio.
  • MSFT is only the second tech stock we own among all our investment holdings.
  • It is 1 of only 2 companies rated AAA by Moody’s (Johnson & Johnson is the other) which provides me peace of mind that my investment is at minimal risk.
  • MSFT is certainly not on sale and I suspect we will likely experience a long overdue market correction in the not too distant future.
  • I suspect our CDN $ will weaken relative to the US $ in a couple of years which will make my recent purchase even more timely.

Introduction

I have been fully aware for several years that our portfolio has been grossly underweight on the tech front. I, however, have been extremely reluctant to invest in companies in this space. My perception of the industry was shaped when I saw what happened to investment portfolios that were overweight the technology sector in the early 2000s. In some cases, friends and acquaintances worked for Nortel AND their investments were heavily weighted in the tech sector. That was disastrous!

On September 19, 2017 I finally decided to add Microsoft Corporation (NASDAQ: MSFT) to our overall holdings. It is a member of the FFJ Master Stock List yet I have never owned any shares. Cisco Systems, Inc. (NASDAQ: CSCO) is the only other true “tech” stock we hold across multiple investment accounts.

I recognize MSFT is certainly currently not on sale but I view the current price as reasonable based on forward earnings. I intend to hold these shares for at least another 14 years at which time I must begin withdrawals from the locked-in registered retirement saving plan component of our investment holdings. Given this, if we experience a long overdue market correction I suspect that several years in the future we will look back at MSFT’s stock chart and any correction in stock price will merely appear as a temporary blip.

I apologize if MSFT provides little in the form of excitement for you. In my case, MSFT’s AAA Moody’s credit rating is greatly appealing to me; I recently reviewed Johnson & Johnson (NYSE: JNJ) which is the only other AAA rated company. I don’t like taking unnecessary risks with my money and restrict my risk taking to white water rafting, rock climbing, tree top trekking, alpine skiing, etc.. In fact, boring suits me just fine when it comes to investing.

I presume anyone reading this post is aware of MSFT. I am, therefore, restricting my review on the dividend, dividend growth potential, valuation, and rationale for the recent acquisition of 240 shares for the FFJ Portfolio.

Dividends, Dividend Growth, and Share Repurchases

I suspect a dividend increase announcement is imminent. While I have no crystal ball, I think a $0.03 increase from $0.39/quarter/share will be announced. MSFT’s dividend history can be found here.

The current $1.56 annual dividend translates into a 2.06% dividend yield based on my $75.61 purchase price. While the yield is low I will not be relying on the dividend income to cover living expenses. I will merely reinvest the dividends.

I note that MSFT has ample FCF and the trailing 12 month dividend payout ratio of ~56.5% leaves room for the continuation of dividend increases.

Source: Morningstar

If my assumption of a $0.42/quarter/share dividend materializes this would represent an 8% increase from FY2017. While certainly not double digit growth as in previous years, an 8% growth is well in excess of the rate of inflation in the US and in Canada.

Source: Microsoft Website

President Trump has been talking about a short tax-reform plan which would include a one-time tax on trillions of dollars held overseas; note where MSFT ranks on this list of companies. While US companies took advantage of the 2004 American Jobs Creation Act to repatriate overseas funds to the US, MSFT’s course of action with respect to its dividend stands out from other large multinationals which took advantage of the one-time tax break.

We have several companies within our holdings which stand to benefit from the implementation of a short-tax reform plan. If MSFT were to hypothetically declare a special $2/share special dividend, I certainly will not be able to do much with $480 (240 shares). I would far prefer repatriated funds be used to grow the business or to repurchase shares.

Source: Microsoft Fiscal Year 2017 Fourth Quarter Earnings Conference Call Presentation dated July 20, 2017

The condition, however, is repurchased shares be done at attractive prices. In this regard, here’s hoping:

  • a one-time tax break is approved;
  • MSFT takes advantage of it;
  • and the market experiences a major correction.

Valuation

Multiple brokers have projected 2018 Adjusted EPS of $3.14/share.

Source: TD WebBroker

Using the current stock price of $75.44 and an Adjusted EPS estimate of $3.14, I get a forward PE of ~24.

Source: Morningstar

I totally agree this is not an extremely attractive level. I am not, however, one to time the market nor do I buy to hold for the short-term. Furthermore, I only purchased 240 shares. If MSFT were to drop $50 to the ~$25 range, for example, we’re only talking a $12,000 drop in value. I strongly suspect a drop of this magnitude would reverse well before I require use of any funds from my locked-in RRSP.

If you are a Canadian like me, you have the favorable CDN $/ US $ foreign exchange rate for which you should be thankful.

As you can see below, the CDN $ has rallied in recent months relative to the US $.

Source: Canadian Forex

While forecasts call for the CDN $ to strengthen relative to the US $ throughout 2018, I strongly suspect that over the long-term the CDN $ is not going to return to parity with the US $. I expect the CDN $ will weaken to the mid $0.70s. This will bode well for our overall portfolio since a sizable component of our overall holdings is in US companies.

Microsoft Corporation Stock Analysis – Final Thoughts

I certainly have several companies in which I would like to invest but expectations are that Canadian companies will likely be in for a rough ride in the coming months. In addition, I suspect our CDN $ will be weaker relative to the US $ in a few years time. I am, therefore, focusing on acquiring shares in US listed entities (particularly in tax advantaged accounts to avoid a 15% withholding tax on US dividends).

After much deliberation I decided to pull the trigger on MSFT. Considering MSFT is 1 of only 2 companies that is rated AAA by Moody’s and is a member of my FFJ Master Stock List you would think I would have acquired MSFT shares years ago. Why I didn’t is beyond me. Mea culpa!

I will update my FFJ Portfolio report at month end to reflect this recent purchase.

Thanks for reading!

Note: I sincerely appreciate the time you took to read this post. As always, please leave any feedback and questions you may have in the “Contact Me Here” section to the right.

Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.

Disclosure: I am long MSFT, JNJ, CSCO.

I wrote this article myself and it expresses my own opinions. I do not receive compensation nor do I have a business relationship with any company mentioned.

My Amazon picks.