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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.

During the 1990s, Microsoft (NASDAQ: MSFT  ) put thousands of workers in position to retire at will, with a massive run-up in its stock that made millionaires out of even some rank-and-file employees. But lately, Microsoft has been stuck in a mature-company rut. Can the company reignite its growth engine once more? Let's 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.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$231 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

0.97

Fail

 

Worst loss in past five years no greater than 20%

(44.4%)

Fail

Valuation

Normalized P/E < 18

14.44

Pass

Dividends

Current yield > 2%

3.3%

Pass

 

5-year dividend growth > 10%

15.4%

Pass

 

Streak of dividend increases >= 10 years

10 years*

Pass

 

Payout ratio < 75%

45.1%

Pass

       
 

Total score

 

8 out of 10

Source: S&P Capital IQ. Total score = number of passes.
*Based on fiscal years.

Since we looked at Microsoft last year, the company has picked up a point, thanks to counting its fiscal-year dividend increases. The shares, however, haven't done nearly as well, dropping about 10% over the past year.

Microsoft has thrived over the years as a result of its cash-cow operating system and office software, each of which brings in more than a quarter of the company's overall revenue and together account for all of its profits. Yet with the decline of the PC in favor of mobile devices, investors worry that Microsoft's days of dominance may be numbered if it can't adapt to changing technology trends, as Apple (NASDAQ: AAPL  ) and Google (NASDAQ: GOOGL  ) have captured huge portions of the mobile OS market as a result of their iOS and Android offerings, which now lead the smartphone market.

As a result, investors have looked closely at the recent release of the more mobile-friendly Windows 8 operating system and the Surface tablet. The original Surface got off to a slow start, but with the Surface Pro version having become available over the weekend to strong demand, Microsoft finally offers a full-blown tablet capable of running PC-style applications. The tablet may also boost Intel's (NASDAQ: INTC  ) mobile fortunes, as the Pro uses an Intel i5 processor, although short battery life concerns for the Surface Pro may raise questions about Intel's capacity to provide power-friendly mobile processors.

As for Windows 8, it hasn't been nearly the success that Microsoft had hoped. The operating system failed to bail out ailing PC manufacturers, and even though Microsoft said in mid-January that it had sold 60 million Windows 8 licenses, many of those were discounted upgrades that won't necessarily produce huge amounts of revenue.

For retirees and other conservative investors, none of this arguably matters. So far, the Windows and business software divisions have managed to grow both sales and profits despite adverse trends away from PCs, producing huge amounts of cash that have led to higher dividends. With shares trading at a very reasonable valuation, Microsoft doesn't need to be a big grower to give investors good value at current prices.

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.

Learn more on Microsoft from The Motley Fool's premium research report on the software giant. Inside, you'll find in-depth analysis geared at helping you decide whether Microsoft is a buy, going through the company's challenges and opportunities. You'll also get regular updates as key events occur. Claim your copy of this report now by clicking here.

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


Read/Post Comments (2) | Recommend This Article (10)

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 February 10, 2013, at 10:10 AM, techy46 wrote:

    Microsoft already helped me retire rich having worked 42 years moving enterprises from IBM mainframes to DEC and DG miicomputers, Microsoft and Novell networks and finally Microsoft privat and public cloud applications. Apple and Android still are stuggling to convince enterprises that they are worthy providers of clients and non-critical applications.

  • Report this Comment On February 11, 2013, at 1:00 AM, applefan1 wrote:

    Apple is gaining ground in the Enterprise, Government and Educational markets.

    Microsoft is losing ground due to their ineptness in the tablet and smartphone arena.

    Android is just for kids that don't have or want to spend any money on hardware and software solutions, they attract those that like playing around with hacking the OS and games and not much else. They seem like bored individuals with nothing better to do.

    As long as Apple continues to improve their hardware and OS, they will continue to take over market share. I think the Windows 8 direction is dividing Microsoft users into different camps and those that don't want to go with Windows 8 will either stick with what they have, or will switch to OS X and IOS devices. It won't happen over night, it will happen gradually the migration from a certain percentage of WIndows users switching. I'm wondering what the latest data is in terms of Windows switchers, no one has released that information, but every time I go to an Apple Store I see people bringing in their Windows computer to get migrated over to OS X laptops/desktops. It wouldn't surprise me if at least 25% of the Apple OS X and iOS customers are WIndows users in the process of switching.

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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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