DRIP Candidate Winner: Microsoft

Choosing between IBM (NYSE: IBM  ) and Microsoft (Nasdaq: MSFT  ) for our first DRIP Portfolio investment was sort of like playing pick-up basketball, and having your first pick be Kobe Bryant or LeBron James. You know that either one would make your team better, but how do you decide between two titans?

In the end, we chose Microsoft. It was a close race, though. How close? We're glad you asked.

Prospects/Growth (advantage Microsoft): Despite a few product flops, Microsoft increased sales nearly 7% year over year, while IBM's sales were flat. In fact, IBM has only grown sales at 0.2% compounded over the past five years, versus Microsoft's 9.4%. Yes, this is backward-looking, but we think the combination of Microsoft's Word and Office legacy platforms, in addition to its prospects in mobile and cloud computing, will keep Microsoft growing at a steady pace in coming years.

Execution (advantage IBM): It isn't too harsh to compare the execution of Ballmer & Co. to a brick off the back of the rim. Perhaps it's too busy fending off antitrust lawsuits or counting its cash, but Microsoft has never been able to progress from concept to launch with as much zeal and panache as a company like Apple (Nasdaq: AAPL  ) . IBM, on the other hand, has a silky stroke on par with Jesus Shuttlesworth.

Look no further than its recent business performance. When the company announced its goals for 2010 way back in 2007 (the cherry on top was to grow EPS from $6 to $9), the Street laughed. They were right to, but not because IBM couldn't hit the mark. IBM earned EPS of $10.12 in 2009. A buck more and a year ahead of schedule.

Stewardship (advantage Microsoft): We liked that Microsoft has split chairman (Bill Gates) and CEO (Steve Ballmer) roles. This allows the chairman to schedule and set the agenda for board meetings without direct interference from the CEO, and helps keep the board independent from the executive suite. Also, Microsoft issues restricted stock grants, rather than employee stock options. This is a good move for a number of reasons, including reducing the shareholder dilution brought on by option issuance.

Risks (advantage IBM): Big Blue gets the nod here for its proven ability to play offense. IBM was referred to as "corporate Play-Doh" in last week's article because of the company's willingness and ability to change its course. Microsoft stands in stark contrast in this regard -- always playing defense. Heck, its nickname is "Mr. Softy." With cloud computing as a shared threat, and the financial wherewithal to mount an attack a non-issue for either tech giant, when it comes to survival, we'd rather play offense than defense.

Valuation (advantage Microsoft): In last Monday's article, Bryan found that IBM's fair value was roughly 10% above the current market price, whereas I (Todd here) think Microsoft is closer to 20% undervalued. Given Microsoft's rock-solid balance sheet, and the fact that investors are already quite bearish, we think the downside risk/upside potential trade-off favors Microsoft.

Bottom line: Microsoft edged out IBM, 3 to 2.

DRIP details
To begin your Direct Stock Purchase (DSP) / DRIP investment in Microsoft, start on this page to read the plan's prospectus, which outlines all the fees and costs. Be sure to read it carefully!

Among other things, you'll want to note:

  1. The minimum initial purchase is $250; after that, it's at least $25.
  2. If you own less than 100 shares, your dividends will automatically be reinvested. Plus, there's no fee for reinvestment if you own less than 100 shares.
  3. If you make additional purchases, the fee is $2.50 per transaction and $0.10 per share. So if you bought 10 additional shares, it would cost $3.50 ($2.50 + $1.00).
  4. You'll get a statement after each dividend is paid, or you can view your account online.

Once you've reviewed the prospectus, click the link on the bottom of this page to invest online and follow the step-by-step instructions.

The Fool's fantastic disclosure policy makes us wait at least 10 days before purchasing our own shares. We'll let you know when we've made our transaction.

Neither Todd nor Bryan owns shares of any company mentioned ... but they will soon be owners of Microsoft via their shiny, new DSP/DRIP accounts! Microsoft is a Motley Fool Inside Value recommendation. Apple is a Motley Fool Stock Advisor pick. Motley Fool Options has recommended a diagonal call position on Microsoft. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (17)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 02, 2010, at 4:57 PM, tbarth88 wrote:

    I buy a lot of my stock via DRIP, Microsoft being one of them. I have also been buying Microsoft for my son in his DRIP account. I like the process and for small purchases made regularly it is cheaper than going through a discount broker

  • Report this Comment On August 02, 2010, at 9:18 PM, rdtuck02 wrote:

    Looking forward to the next faceoff

  • Report this Comment On August 03, 2010, at 1:27 PM, TMF42 wrote:

    rdtuck02:

    We are pitting industrial firms against one another next...stay tuned!

    Bryan

    TMF42

  • Report this Comment On September 22, 2010, at 1:35 PM, lethalvb01 wrote:

    How come the DRIP webpage says the broker commission fee is $15 plus 10 cents at the bottom?

  • Report this Comment On September 22, 2010, at 1:35 PM, lethalvb01 wrote:

    Oh wait, that is the share sale fee, nevermind.

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