The next selection for the newly-launched Inflation-Protected Income Growth Portfolio is technology giant Microsoft (MSFT +0.66%). Perhaps best known for its iconic Windows and Office software suites, Microsoft also owns the Xbox and the newly launched Surface tablet computers.
A relatively new member of the dividend club, Microsoft has nevertheless embraced the concept of paying and raising its dividends in a very positive way. After rewarding its shareholders with a 2004 special dividend, the company has paid out a higher regular dividend every single calendar year. And with the widespread perception that Microsoft is a business in decline , Microsoft has no better weapon to combat that belief than continuing with its well-supported -- and rising -- dividend.
Why it's worth owning in the iPIG Portfolio
To earn a spot in the portfolio, a company has to pass a series of tests related to its dividends, its balance sheet and valuation, and how it fits from a portfolio diversification perspective.
Dividends:
- Payment: The company's annual dividend currently sits at $0.92 a share , a yield of nearly 3.4% based on Wednesday's closing price.
- Growth history: The company has paid higher dividends every year after its 2004 special dividend payment.
- Reason to believe the growth can continue: With a payout ratio of 43%, the company retains more than half of its income to reinvest for future growth. Additionally, since its cash flow statement indicates that its earnings are very well covered by cold hard cash , there's little risk that a near term cash crunch will derail those plans.
Balance sheet and valuation:
- Balance sheet: A debt-to-equity ratio of 0.18 indicates that the company does use debt, but very sparingly, and it certainly hasn't over-leveraged itself to the point where a financial hiccup would derail it. Indeed, it's one of a small handful of companies with AAA rated debt .
- Valuation: By a discounted cash flow analysis that assumes no growth ever again, the company looks to be worth around $234.5 billion , making its recent market price of $229.9 billion look reasonable. Of course, there's some risk involved -- if the company truly is in a state of perpetual decline, then even that estimated value can turn out to be too rosy.
Diversification fit:
The previous picks for the portfolio included:
- An industrial conglomerate
- A generic pharmaceutical powerhouse
- A provider of staple foods
- An auto parts distributor
- A safety equipment provider
...making this high tech titan a reasonable fit.
What are the risks?
For years, Microsoft has been out innovated by Apple (AAPL +1.18%), whose MacOS inspired Windows, whose iPad inspired the Surface, and whose iPhone inspired the Windows phone. That trend will likely continue, keeping Microsoft in the tough position of continually playing catch up.
Additionally, Google's (GOOG +2.53%) Chrome operating system and Google Apps provide a credible threat to Microsoft's dominance in the workstation operating system and office productivity space. On a similar note, the growth of cloud computing, led by the likes of Amazon (NASDAQ: AMZN), means that the need for constant personal computer upgrades to maintain productivity could slow. Each delayed upgrade delays the generation of new revenue for Microsoft's Office and Windows platforms.
What comes next?
When the Fool's disclosure policy allows, I plan to buy Microsoft stock for the Inflation-Protected Income Growth portfolio, as long as its share price remains below $28. I expect to invest around $1,500 in the selection, giving it a 5% allocation in the portfolio. With 70% of the portfolio still remaining in cash, watch my article feed for details of the next pick, coming soon.
Also, to score the performance of this pick, I'm maintaining my previously existing outperform CAPScall on the stock at Motley Fool CAPS, putting my All-Star ranking on the line along with the plan to invest cold, hard cash.
