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Near an All-Time High, Microsoft Stock May Still Be a Buy

By Daniel Sparks - Jun 16, 2021 at 7:45AM

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Here's why the software giant is attractive -- even with a $2 trillion market capitalization.

It's tempting to assume megacap companies like Microsoft (MSFT -0.26%) are unlikely to outperform the market over the long haul simply because they're already so big. But what some investors may miss is that even a mature company can continue rewarding shareholders over the long haul. Further, many megacap tech companies have some of the strongest competitive advantages, making them quite attractive investments.

Microsoft is a great example of a massive company that remains a good investment. Here's why the software giant is worth a spot on your watchlist -- and maybe even a spot in your portfolio.

A woman looking at a stock chart on a laptop.

Image source: Getty Images.

Business momentum

Despite its $2 trillion market capitalization, Microsoft's business is still growing rapidly. Indeed, it's arguably still a growth stock.

Consider Microsoft's most recent quarterly results. In its third quarter of fiscal 2021, total revenue grew by $6.7 billion year over year, or 19%. Even more, this growth was broad-based, with growth across every one of the company's segments. 

The company's commercial cloud revenue, or revenue from Microsoft 365, Azure, and Dynamics 365, rose 33% year over year to $17.7 billion. Further, this rapidly growing segment's gross margin expanded by three percentage points year over year to 70%. Microsoft's cloud computing business, Azure, saw its revenue surge by 50%.

With strong and significant catalysts like this, Microsoft looks poised to see robust top-line growth rates for years to come.

A promising dividend

Unlike some growth stocks that still haven't managed to begin generating profits, Microsoft is throwing off heaps of cash -- enough to pay its shareholders a solid dividend.

An impressive $0.34 of every dollar of Microsoft's sales was free cash flow, or the cash left over after regular operations and capital expenditures are accounted for. This cash flow is the good stuff that management can save for future acquisitions or use on share repurchases or dividends. Indeed, Microsoft paid out a whopping $16.1 billion in dividends to shareholders over the trailing 12 months ending March 31.

Sure, Microsoft's dividend yield of 0.9% may seem small. But this is a growing stream of income. The company's $0.56 quarterly dividend is up from $0.36 just five years ago. Further, there's good reason to expect more strong dividend growth going forward; the company is currently only paying out 30% of its free cash flow in dividends, leaving plenty of room for annual dividend increases.

With all of this in mind, the stock still appears to be an attractive investment -- even at 35 times earnings and near its all-time high of $263.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Microsoft. The Motley Fool has a disclosure policy.

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