The real-money Inflation-Protected Income Growth portfolio owns shares of Microsoft (NASDAQ:MSFT). Microsoft, like every company in that portfolio, earned its place because at the time it was purchased:
- Its shares appeared to be reasonably priced.
- Its balance sheet looked solid.
- It had a covered dividend with a history of increases.
- That dividend looked capable of continuing to rise.
- The company fit reasonably well within the portfolio from a diversification perspective.
Still, just because a company fit a portfolio at one time doesn't mean it will fit forever. This article reviews the current state of several of the key factors that made Microsoft worth owning to determine whether it still has what it takes to retain its spot in the IPIG portfolio.
Based on a discounted cash flow analysis, Microsoft's business looks to be worth around $315 billion, which, conveniently, is exactly in line with its recent market price. Since the company's market capitalization is right in line with the IPIG portfolio's fair value estimate, the IPIG portfolio would consider buying at this price if it didn't already own shares.
Still, any fair value estimate is based on projections of an unknown future, and nobody has the ability to predict it exactly correctly. In any event, since the company's market price is at that fair value estimate, there doesn't appear to be a compelling case to sell based on valuation.
Result: Hold, based on valuation.
Microsoft has a solid balance sheet, with a debt-to-equity ratio of around 0.3. That reasonable debt-to-equity ratio gives the company the flexibility to manage through financial turmoil and economic cycles while remaining strong. In addition, the company has more than $10 billion in cash on its balance sheet, which positions it well for servicing its existing debt while continuing to reward shareholders. To top it off, Microsoft is one of only a handful of companies that carries a top-notch AAA debt rating.
Result: Hold, based on balance sheet.
Microsoft currently pays a quarterly dividend of $0.28 per share, and it has paid two dividends at that level. In addition, Microsoft has a fairly decent track record of increasing its dividend annually, though it did go the stretch from late 2008 through mid-2010 without increasing its payment. Dividend growth is an important characteristic that the iPIG portfolio actively seeks, and with a payout ratio of 36%, Microsoft has room to continue increasing its dividend as is business grows.
Result: Hold, based on dividends.
All told: a company still worth owning
Looking at its valuation, its balance sheet, and its dividend, Microsoft still maintains the essential qualities needed to retain its place in the Inflation-Protected Income Growth portfolio. That may change over time, though, depending on the company, its competition, regulatory shifts, the whims of the market, and changes in its operating environment that affect its ability to thrive. As a result, the company will again be reviewed in the future to make sure it still deserves a spot in the portfolio.
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Chuck Saletta and The Motley Fool own shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.