Saturday, 17 November 2012

Microsoft on Sale?


Like I’ve said before, technology stocks have never really been my thing. Their recent attractive valuation has caused me to reconsider. I bought Dell hoping to make a quick buck on capital gains, but that looks like it may take longer than I initially anticipated; it may even turnout to be a quick capital loss.

Microsoft recently popped up on my radar. Here's why:

Average Dividend Yield*

MSFT
Year
High Price
Low Price
1Q
div.
2Q
div.
3Q
div.
4Q
div.
Annual Dividend
High Yield
Low Yield
2003
$30.00
$22.55
$0.08
---
---
$0.16
$0.24
1.06%
0.80%
2004
$30.20
$24.86
---
---
$0.08
$0.08
$0.16
0.64%
0.53%
2005
$28.25
$23.82
$0.08
$0.08
$0.08
$0.08
$0.32
1.34%
1.13%
2006
$30.26
$21.46
$0.09
$0.09
$0.09
$0.10
$0.37
1.72%
1.22%
2007
$37.50
$26.60
$0.10
$0.10
$0.10
$0.11
$0.41
1.54%
1.09%
2008
$35.96
$17.50
$0.11
$0.11
$0.11
$0.13
$0.46
2.63%
1.28%
2009
$31.50
$14.87
$0.13
$0.13
$0.13
$0.13
$0.52
3.50%
1.65%
2010
$31.58
$22.73
$0.13
$0.13
$0.13
$0.16
$0.55
2.42%
1.74%
2011
$29.46
$23.65
$0.16
$0.16
$0.16
$0.20
$0.68
2.88%
2.31%
2012


$0.20
$0.20
$0.20
$0.23
$0.83


2013


$0.23
$0.23
$0.23
$0.23
$0.92


Stock prices and dividends are per calendar year
8y ave
1.97%
1.31%
Dividends are listed in the quarter they were paid
5y ave
2.59%
1.40%







3y ave
2.93%
1.56%







5y
$35.49
$59.39







3y
$31.39
$53.30






Super Cheap
$26.31





The table shows the 3 year average dividend yield to be 2.93% ((3.5% + 2.42% + 2.88%)/3). I use the numbers in the “High Yield” column for obvious reasons.

Using the current cash dividend of $0.92, one would have to pay $31.39 for a 2.93% yield.

Buying the stock at its low in 2009 would have earned you an initial yield of 3.50%. Using the current dividend, that corresponds to a stock price of $26.31 today (see “super cheap” price in the table above). On Friday, MSFT closed at $26.52.

Graham Price

MSFT’s 2010, 2011 and 2012 EPS were $2.10, $2.69 and $2.00. 3Y Ave EPS = $2.26.
MSFT’s book value is $8.17.
Graham Price = SQRT (3Y Ave EPS * BV * 22.5) = $20.40

Cyclically Adjusted Price to Earnings Ratio

MSFT’s 10Y Ave EPS = $1.57
CAPE = 10Y Ave EPS / Stock Price = $26.52/$1.57 = 16.9
A CAPE below 20 is very good.

Conclusion

These three metrics indicate that MSFT is fairly valued, maybe even undervalued.

Microsoft is a company everyone loves to hate, but they still make money hand over fist. Over the last year, EPS decreased from $2.69 to $2.00. However, EPS increased 4 fold between 2001 and 2011 ($0.66 to $2.69). That’s pretty damn good.

In 2003, MSFT paid a special dividend of $3.00. In my opinion, they should have paid another instead of buying Skype.

I’ll consider buying MSFT if it drops below $23 (i.e. 4% yield).

*My method is not perfect as the stocks low price may have occurred before the annual dividend increase.


4 comments:

  1. MSFT and INTC are both cheap right now. I hate tech stocks and don't want to bet my retirement on one particular company in the sector. That said I may have to add a few shares of INTC sometime soon. Can't ignore these prices. Same could be said of MSFT, but I have greater faith in the Intel story.

    ReplyDelete
    Replies
    1. I have to agree with you on INTC. I placed an order early last week for INTC 100@$19.50. It expires on Nov 23. I hope the market stays down for a while. I've been looking into CSX and UNP. UNP is still "expensive" by my metrics and CSX looks attractive below $18.50.

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  2. I admit I avoid tech stocks, because the sector seems to be every changing...hard to know whats going to happen next as far as what company comes up with the next big idea

    ReplyDelete
    Replies
    1. I bought Dell because they are converting to the IBM model. I bought Intel because of their reputation. But I get ya...all you need is a teenager to come up with a revolutionary idea and your stocks could go caput...

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