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Stay on target ... stay on target ...

Cheap stock? Check. Defensible business? Check. Dividends and buybacks? Check. Check.

Despite its much-ballyhooed snafus, Microsoft (Nasdaq: MSFT) is a stock that you still have to love. Even in spite of its monopoly-type position in a few key markets, dominance that has led detractors to compare it to an evil empire, a Death Star of software. But profit you can ...

Market Cap

$213 billion



Revenue (TTM)

$62.5 billion

Earnings (TTM)

$18.8 billion


$36.6 billion / $6 billion

Source: Capital IQ, a division of Standard & Poor's, and company filing. TTM = trailing 12 months.

I mean cheap
Buying a stock that's cheap can wipe away a host of investing sins. After all, that's the concept of margin of safety that Warren Buffett, Ben Graham, and other great value investors have preached. And such is the case with Microsoft, which has rarely been as cheap as it is now.

The stock now trades at less than 12 times earnings. If you back out net cash and short-term investments of $37 billion, then it's trading at around 10 times earnings. That's cheap, but how cheap? Using Graham's growth formula, Microsoft's price implies earnings growth of less than 1%. Sure, the software giant's growth has slowed of late, but it still managed annual EPS growth of 13% over the last five years. That is solid.

And do you ever think of installing another operating system or using another word processing or spreadsheet program? That brings me to my second point.

Cheap + dominant = profit
Yes, I know Google (Nasdaq: GOOG) and Apple (Nasdaq: AAPL) are beating the pants off Mr. Softy when it comes to mobile software, and that's not a great thing. And Google is dominating search, too. And Apple's devices have the fanboys drooling over the next pearl to drop from Steve Jobs' mouth. Devices are another place Microsoft has largely failed, whether it be music devices, Kin, or whatever its brass thumb has touched. It still doesn't matter. Microsoft is like Britney Spears on a bender: Its failures score the headlines, but that bad publicity is testament to its ubiquity in our daily lives. People want to know -- good, bad, or neutral -- what's going on with the world's largest software company.

Microsoft's dominance in operating systems and office software is a wonder to behold. Its Windows and Office divisions generated $24 billion in operating profit last year. The company as a whole generated $25 billion in operating profit last year. (The Server division is quite profitable, too, but it offset losses in other divisions.) Windows has some 90% market share, while its Office software does even better. In the Office space, second-place Adobe (Nasdaq: ADBE) has just 4% share, while Google has perhaps 2%. So forget the headlines and focus on these two keys to the company's ongoing success.

And the company has taken numerous steps to secure these strongholds, as we increasingly move into the world of cloud computing.

Microsoft is attempting to make its software the product of choice among small and medium-sized businesses. With its comprehensive set of software, Microsoft can offer discounts to businesses for being an all-Microsoft shop. Not only that, but they've been feverishly working to build ties in between their full set of software solutions.

That's a nice move to fortify its competitive moat, since the tech titan can offer value to customers even as it locks in a monopolistic position. By offering discounts and offering a pretty complete set of solutions, Microsoft makes the switching costs that much more obvious to its customers. If customers go to another competitor, they suffer cost disadvantages. What's the incentive for them to change?

And then there's the fat dividend. And the repurchases.
Microsoft is a slower-growing (not slow-growing) cash cow. While that doesn't exactly excite the momentum investors who want action right now at all costs, there are a lot of advantages to investing in such a large cap. Microsoft just prints cash and returns it to shareholders. It's hard not to like that.

Even in its slower-growing phase, Microsoft has been very generous to investors. It has returned nearly $170 billion in dividends and repurchases in the last 10 years. It still has about $24 billion left on a repurchase authorization, so more money could be flowing shareholders' way soon. And earlier this week, the company announced it was sweetening its dividend by 23%

Even better, the company has indicated that it is optimizing its financing to deliver even greater value to shareholders. It has stated that it could issue as much as $6 billion in debt, which could be used to fund buybacks and repurchases. And given the insanely low interest rates that bond investors are willing to accept from high-quality borrowers such as Johnson & Johnson (NYSE: JNJ), and McDonald's (NYSE: MCD), Microsoft (with its AAA credit rating) should do everything in its power to take advantage of cheap rates. With investors desirous to lend to anything with a pulse, it makes a lot of sense for these large caps to borrow billions even if they don't need it at the moment. Just weeks ago, fellow tech titan IBM (NYSE: IBM) used the conditions to get a billion-dollar loan that pays just 1% interest.

The bottom line
Microsoft is making a lot of moves that investors should love. And the market just doesn't seem to care right now. That spells opportunity. And as soon as The Motley Fool's 10-day no-trade rule expires on my mention of Microsoft, I expect to lard up my portfolio with some Microsoft shares. How about you?

Interested in reading more about Microsoft? Add it to My Watchlist, which will find all of our Foolish analysis on this stock.

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Jim Royal, Ph.D., owns shares in Microsoft. Google and Microsoft are Motley Fool Inside Value picks. Google is a Rule Breakers recommendation. Apple and Adobe are Stock Advisor picks. Johnson & Johnson is an Income Investor choice. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Apple, Google, Johnson & Johnson, and Microsoft. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.