New Dividend Growth Stock Buy: Microsoft (MSFT)

Of all the investment opportunities out there, I have a special place in my heart for dividend growth stocks. As a subset of those, I like the ones on the list of Dividends Champions, Contenders and Challengers even better.

Recently I added another one of these Dividend Contenders to my portfolio.

On November 20 I bought 15 shares of Microsoft (MSFT) for a total of $1,530.

In this post I go over the reasons for making this Microsoft addition to my portfolio and what this purchase means for my forward dividend income. 

Microsoft Corporation develops, licenses, and supports software, services, devices, and solutions worldwide.

Its company’s Productivity and Business Processes segment offers Office 365 commercial products and services for businesses, such as Office, Exchange, SharePoint, Skype for Business, Microsoft Teams, and related Client Access Licenses (CALs); Office 365 consumer services, including Skype, Outlook.com, and OneDrive; LinkedIn online professional network; and Dynamics business solutions comprising financial management, enterprise resource planning, customer relationship management, supply chain management, and analytics applications for small and medium businesses, large organizations, and divisions of enterprises.

The company’s Intelligent Cloud segment licenses server products and cloud services, such as SQL Server, Windows Server, Visual Studio, System Center, and related CALs, as well as Azure, a cloud platform; enterprise services, including premier support and Microsoft consulting services to assist customers in developing, deploying, and managing Microsoft server and desktop solutions, as well as providing training and certification to developers and IT professionals on Microsoft products.

Its More Personal Computing segment offers Windows OEM, volume, and other non-volume licensing of the Windows operating system; patent licensing, Windows Internet of Things, and MSN display advertising; devices comprising Surface, PC accessories, and other intelligent devices; Xbox hardware and software and services; and Bing and Bing Ads search advertising.

The company markets and distributes its products through original equipment manufacturers, distributors, and resellers, as well as through online and Microsoft retail stores. Microsoft Corporation has collaboration with E.ON to develop smart connected home solutions.

The company was founded in 1975 and is headquartered in Redmond, Washington.

MSFT’s current dividend yield is 1.81% – below the average 3.5% yield I strive for in building my portfolio.

Unlike the company’s decidedly uncool image in the 90s and 2000s, the company’s current dividend features look pretty attractive.

For instance - the company is featured on David Fish’s list of Dividends Champions, Contenders and Challengers - with an impressive 17 year streak of growing dividend pay-outs.

The 5 year dividend growth is a nice double digit 10.44%, with the 1 year dividend growth coming in at 9.52%.

The Current Trailing Dividend Payout Ratio sits at 76%, providing some room for continued dividend growth.

MSFT’s Earnings per Share (EPS) over the last five years show an -3.76%  decrease. However, projected EPS growth for the next 3-5 years is +13.68%.

The Free Cash Flow Growth Rate over the last 5 years is +0.99%.

The trailing 12 months Price/Earnings (P/E) is 42.20, which is quite higher than it’s 5 year average of 28.55. It is lower though than the Software industry’s 5 year average of 47.16.

ISS-EVA Dimensions (an equity research firm) states in their November 21 report that MSFT’s Performance Risk Valuation score is at the 78th percentile of all firms in its industry, which leads to a recommendation to Overweight. MSFT is more attractively priced in relation to its true value
than well over half of the stocks in its industry.

Ford Equity Research projects that MSFT will outperform the market over the next 6 to 12 months. Ford’s 52-Week Price Range is between $81.08 - $115.61.

Jefferson Research contends that MSFT is showing strong Earnings Quality, Cash Flow Quality and Operating Efficiency, and Valuation suggests a lower amount of price risk, but Balance Sheet Quality is weak. When combined, MSFT deserves a HOLD rating.

Given MSFT’s annual dividend of $1.84  per share, this new purchase increased my forward annual dividend income by $27.60.