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Did Microsoft Corporation Just Become the Best Growth and Income Stock in Tech?

By Tim Brugger - Sep 23, 2015 at 7:20PM

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The cloud and software giant has had a rough go of it this year, but its recent move could make it one of the best tech investments around.

Source: Flickr.

As is the case with many stocks in today's uncertain economic environment, Microsoft (MSFT 2.76%) shareholders haven't had much to get excited about this year. That said, the shares are faring better than some, "only" down about 5% year to date. By contrast another tech bellwether, IBM (IBM 1.74%), has seen its stock decline over 10% in 2015, so things could be worse for Microsoft fans.

Microsoft's stock performance would likely be closer to IBM's if not for a strong run of results in new key areas led by CEO Satya Nadella's "mobile-first, cloud-first" strategic initiatives. Another arrow in Microsoft's quiver was announced on Sept. 15, and was enough to warrant a 2% jump in share price in one day, and its stock has slowly but surely continued to inch up. The news was timely, to say the least, and should be music to the ears of long-term growth and income investors.

Better still
Microsoft's $0.31 quarterly dividend had been in place for the past year, and its 2.8% yield -- give or take-was nothing to sneeze at. However, stacked up against the likes of IBM's 3.6% dividend payout, among others in the tech sector, Microsoft's dividend was lagging.

Its so-so yield was particularly vexing considering that as of last quarter Microsoft was sitting on $95.6 billion in cash, cash equivalents, and short-term investments. And that's just here in the states: At last count, Microsoft had nearly $70 billion in cash sitting abroad. With a meandering stock price, impatient investors waiting for Microsoft's mobile and cloud efforts to begin paying off, and a hoard of cash, it was the perfect time to up the ante and reward shareholders, which is exactly what Nadella did on Sept. 15.

Microsoft shareholders of record on Nov. 17 will now enjoy a 16% jump in dividend yield thanks to its new quarterly payout of $0.36. At about 3.25%, as of this writing, Microsoft isn't quite at IBM's level, but that's an awfully sound return considering it offers so much growth potential as well.

The new Microsoft
Like IBM, investors can't seem to get past the notion that Microsoft isn't solely about PCs any longer. A big part of the reason Windows 10 has made such a splash -- and not just the 75 million downloads in its first month of availability -- is its compatibility with mobile devices.

You don't have to go far to find naysayers of Microsoft's mobile results. But it's not all bad news as it relates to Nadella's mobile-first efforts. The Surface Pro 3 and lower-end Surface 3 are nearing $1 billion in quarterly revenue, and will likely do just that in the coming quarter. Why? Because the $888 million in revenue generated last quarter came with just 150 or so reseller partners. Beginning now, and "in the coming months," Microsoft intends to increase its reseller relationships to over 4,500 around the world -- just in time for the holidays.

Of course, Nadella's plans for mobile go well beyond its owns devices, as evidenced by Microsoft's recent Office 365 updates for iOS units including the new, familiar sounding iPad Pro, among other iDevices. The same mobile strategy applies to gadgets running the industry leading Android OS, too.

Mobile is more than an afterthought for Microsoft, just as big data is a key component of IBM CEO Ginni Rometty's "strategic imperatives," but for both tech bellwethers, it's the cloud that is driving their immediate futures. Though not quite in Microsoft's league, IBM is already on pace to generate $4.5 billion in annual cloud revenue as of last quarter, a whopping 70% jump after accounting for currency exchange rates.

IBM's cloud results are solid, but Microsoft has taken its cloud sales to a whole, new level. Thanks to its emphasis on Software-as-a-Service (SaaS) delivered via the cloud, Microsoft is on track to generate more than $8 billion in sales annually, putting it squarely at the top of the cloud provider list. Now toss in its 16% dividend hike and annual yield of 3.25%, and Microsoft should also top a growth and income investors buy list.


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