Blue chip stock Microsoft Corp. did better than expected in fiscal 2016. This cash-rich U.S. multinational technology stock will continue to build its businesses and reward you. It remains a buy for further long-term share price gains as well as decent growing dividends and an aggressive share buyback program.
U.S. blue chip stock Microsoft Corp. (NASDAQ—MSFT) has reported its results for the fiscal year ended June 30. It remains a buy for further long-term share price gains, as well as decent and growing dividends.
Microsoft earned more last year. In fiscal 2016, it earned an adjusted $22.328 billion, or $2.79 a share. This was up by 6.1 per cent from an adjusted $21.687 billion, or $2.63 a share, the year before.
Microsoft’s earnings per share rose much more than its total earnings. That’s because it repurchased shares. The company reduced the weighted average number of diluted shares by 241 million, to 8.013 billion. That’s down from a peak share count of 10.862 billion in fiscal 2004. These share buybacks automatically increase Microsoft’s earnings per share.
Microsoft’s earnings came in well above the $2.67 a share that the market expected it to earn. Still, the shares fell by 87 cents a share, or 1.6 per cent, when it reported its results. The company’s revenue came in below expectations. This looks like a case where traders ‘buy the rumor, sell the news’. But we think that selling Microsoft is a mistake.
Microsoft’s share price is rising
Microsoft’s shares have climbed over time. For instance, a decade ago, in fiscal 2006, the shares traded at an average price of $25.90 each. The share price has more than doubled since then.
Microsoft began paying dividends in fiscal 2003. Since then, it has raised its dividend every year, except for the difficult year of fiscal 2010. The current dividend of $1.44 a share is up 18-fold from the initial one. It yields a decent 2.44 per cent.
If Microsoft’s share price were to stay the same, you would get a better and better yield as the company raises your dividend each year. In practice, however, the growing dividends are most likely to attract income-seeking investors. They would bid up the price of Microsoft’s shares to the point where the dividend is decent, instead of outstanding.
This tech stock can keep raising your dividends and repurchasing shares, thanks to its solid balance sheet. The company’s cash and short-term investments are over $113.2 billion. Meanwhile, its short- and long-term debt come to less than $62.7 billion. That is, Microsoft could pay off all of its debt and still have cash of $50.6 billion. This and its growing cash flow gives it the means to build its businesses and reward you.
Chief executive officer Satya Nadella said: “This past year was pivotal in both our own transformation and in partnering with our customers who are navigating their own digital transformations. The Microsoft cloud is seeing significant customer momentum and we’re well positioned to reach new opportunities in the year ahead.”
Management seeks new opportunities
The technology sector is turbulent. There are always upstarts challenging existing companies.
Established companies such as Microsoft invest heavily in research and development. This can assist them in keeping up with changing technology. They also buy tech companies to stay on top. Microsoft’s acquisition of LinkedIn is an example of this. It should contribute to Microsoft throughout fiscal 2017.
The Investment Reporter, MPL Communications Inc.
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The Investment Reporter •8/4/16 •