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Will Microsoft Help You Retire Rich?

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Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. In this series, I look at 10 measures to show what makes a great retirement-oriented stock.

Among software companies, Microsoft (Nasdaq: MSFT  ) still dominates the competition. With the decades-long success of its operating systems and business software, the Redmond giant pulls in more cash than it knows what to do with. But many have questioned Microsoft's ability to innovate, especially in light of competitors that have had their stocks perform so much better. Is Microsoft still a good bet for a retirement portfolio? We'll revisit how Microsoft does on our 10-point scale.

The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.

Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

  • Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.
  • Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.
  • Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
  • Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
  • Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

With those factors in mind, let's take a closer look at Microsoft.


What We Want to See


Pass or Fail?

Size Market cap > $10 billion $251 billion Pass
Consistency Revenue growth > 0% in at least four of five past years 4 years Pass
  Free cash flow growth > 0% in at least four of past five years 4 years Pass
Stock stability Beta < 0.9 1.01 Fail
  Worst loss in past five years no greater than 20% (44.4%) Fail
Valuation Normalized P/E < 18 14.76 Pass
Dividends Current yield > 2% 2.7% Pass
  5-year dividend growth > 10% 13.6% Pass
  Streak of dividend increases >= 10 years 6 years Fail
  Payout ratio < 75% 24.4% Pass
  Total score   7 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Microsoft last year, the company has boosted its score by 2 points. Conservative investors have to appreciate accelerated growth in the stock's dividend as well as another year of strong free cash flow growth.

Many see Microsoft as having been left behind by the new-technology revolution. With such heavy reliance on its legacy-software staples, the decline of the PC in favor of mobile devices has hurt the company. In its most recent quarter, Microsoft saw revenue from Windows and Windows Live fall 6%, with even weaker operating profits.

Moreover, the company let a promising start in the mobile area slip away. In 2007, Windows Mobile had a 42% share of the smartphone market. But the rise of Apple's (Nasdaq: AAPL  ) iPhone -- and, later, the iPad -- helped draw attention away from Windows-driven mobile devices, so that even as Apple scored record sales and saw its stock hit almost continual record highs, Microsoft languished.

But Microsoft isn't giving up without a fight. In mobile, the company's partnership with Nokia (NYSE: NOK  ) may have been seen as an act of desperation at the time, as Google's (Nasdaq: GOOG  ) Android platform has come to dominate the industry by sheer numbers. But with more than 100 million Windows Phone-powered smartphones expected in the next two years, Microsoft will give its competitors a run for their money. The company is pushing aggressively into the cloud, seeking to defend its turf with cloud-based software platforms.

Meanwhile, the Xbox gaming system has rewarded Microsoft with its strongest sales growth. And with Windows 8 due out later this year, the company should see a rebound in operating-system sales.

For retirees and other conservative investors, the rising dividend and growing stability in the stock are positives, even if missing out on some of its fellow tech stocks' gains is disappointing. The software giant has certainly taken some strides toward becoming a great stock for retirement investors, and if it can start executing on its many initiatives, it could get even better in the years to come.

Keep searching
Finding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help improve your investing skills and teach you how to separate the right stocks from the risky ones.

If you really want to retire rich, no single stock will get the job done. Instead, you need to know how to prepare for your golden years. The Motley Fool's latest special report will give you all the details you need to get a smart investing plan going, plus it reveals three smart stocks for a rich retirement. But don't waste another minute -- read it today.

Add Microsoft to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services have recommended buying shares of Apple, Microsoft, and Google, as well as creating bull call spread positions on Microsoft and Apple. 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 Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (13)

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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 February 04, 2012, at 11:41 AM, applefan1 wrote:

    Here are two or three trends that make Microsoft not a great investment.

    1. smartphone industry is dominated by Android and iPhone platforms and Microsoft just isn't a player just like Microsoft isn't a player in the media player (ipod) market.

    2. the tablet market is a high growth market and again, Microsoft is probably too late for that party as well, Apple dominates because of both the hardware and software design and sheer number of apps available. Microsoft has a chance to become a player in app software, but that doesn't give Microsoft as much profit when compared to the amount of money they charge for their desktop counterparts,

    3. the Windows market as been losing ground to Apple not only in the desktop/laptop market, but tablets are now the new device that is added on to the computer market, Microsoft can still sell Office, but it loses the OS revenue stream.

    4. now, let's look at the Enterprise market. has anyone done any trend line comparisons as to what is going on with Corporate email systems? Sun, now owned by Oracle, has a email system that can compete against Exchange, but I haven't read about this arena, It would also be interesting to see what is going on in the Cloud and Enterprise catalogories as well, The higher end flavors of Unix can dominate Microsoft in the high end fault tolerant market, so some comparisons and trends should be reviewed to see what is going on these areas,

    5. yes, Microsoft has plenty of cash to burn, but didn't they buy Skype of $8 Billion? How long will it take to see that money back? I think that was a complete waste of money, but then again, I could be wrong.

    6. Is it s stable stock? Yes, it hasn't gone past 30 a share in years is unlikely to go past that number. I look Microsoft as an annuity since it pays dividends, but a high growth stock? No, not anymore.

  • Report this Comment On February 04, 2012, at 2:23 PM, makelvin wrote:

    ".. In 2007, Windows Mobile had a 42% share of the smartphone market. But the rise of Apple's (Nasdaq: AAPL ) iPhone -- and, later, the iPad -- helped draw attention away from Windows-driven mobile devices..."

    Actually, the decline of Windows Mobile has a lot more to do with Google's Android than Apple's iPhone.

    Keep in mind that Microsoft's real customer for their Windows Mobile is the OEM cellphone manufacturers and not the end users. Since Apple has no intention of ever licensing their OS to other OEM cellphone manufacturers, the only alternatives are to either license an OS from a company that they trust or develop their own OS in-house.

    For most OEM, developing their own OS would have been too daunting a task and as a result, they will most likely want to license other OS to build their phones. Now think about it, if it wasn't for Google's Android, what would have been these OEMs' best option for licensing their OS? Microsoft of course. In other word, Apple's introduction of iPhone could have been the best thing that could have happened to Microsoft. All of the OEM manufacturers would have no choice but to flock to Microsoft's Mobile OS to defend against Apple's iPhone. Then came Google; the party crasher. Google offered an mobile OS with similar user interface and experience as Apple's iPhone and it is free. Google essentially took away majority of Microsoft customers and the rest is history.

    Today, Microsoft real foe is not Apple; it is Google.

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