It's been about four months since I recommended Microsoft (Nasdaq: MSFT) as a core stock for your portfolio. Time for a quick update.
Things are still looking bright for Mr. Softy. Since November, Microsoft has sold more than 8 million Kinect gaming units and 2 million Windows Phone 7 licenses. These new products are, of course, on top of Microsoft's cash cows: operating systems and business software. Sales of both should accelerate as the economy improves and businesses satisfy pent-up demand.
I tend to focus on valuations when sizing up a company, and things still look great there as well.
Microsoft quick stats
| Operations | Microsoft is the world's largest software developer, with a near-monopoly on personal computer operating systems and business software. |
| Recent Price | $27.45 |
| Market Cap | $233 billion |
| Trailing P/E Ratio | 11.8 |
| Return on Equity, Last 12 Months | 46.7% |
Source: Yahoo! Finance.
Shares trade at 10.7 times analysts' estimates for 2011 earnings, delivering a 2.3% dividend. Microsoft generated $23 billion of free cash flow over the past 12 months, or a staggering 10% yield on the company's market cap. Put another way, if Microsoft paid out all its free cash flow in the form of dividends, it could pay a 10% yield per year -- and conceivably grow that payout year after year. There simply aren't many other bargains like that in today's market, especially in high-quality businesses like Microsoft.
Then there's the cash hoard. After accounting for debt and long-term investments, it now stands at roughly $40 billion, or nearly $5 per share. Microsoft can do a few different things with this cash. It could pay a one-time special dividend, like it did in 2004. It could add to its already large share buyback program. Or it could make a strategic acquisition. With shares trading at what seem like obviously cheap levels, I'd like to see increased buybacks, and think we very likely will in the year ahead.
Bottom line: Microsoft is doing well, trading cheaply, and possessed of a bright future outlook. As the market surges and bargains dry up, there's still plenty of room for optimism for this company.
