Is Microsoft Corporation (MSFT) a Buy?

Most investors know the story of Microsoft Corporation (NASDAQ:MSFT) all too well: the company’s best days are behind it.  The stock hasn’t gone anywhere in a decade, and the company’s innovation left when Bill Gates did.  Add in the fact that most financial pundits have declared the Personal Computer to be dead, and it should be abundantly obvious that Microsoft Corporation (NASDAQ:MSFT) should be sold.  However, I don’t think it’s that simple.  While I don’t believe the company should be considered a high-growth stock anymore, investors could certainly do worse than a highly profitable, high-dividend stock with a fortress balance sheet.

A Challenging Start to Fiscal 2013

In late January, Microsoft Corporation (NASDAQ:MSFT) reported its financial results over the first half of the fiscal year.  Total revenue dropped 2% during the first six months year over year.  Earnings per share, meanwhile, dropped 12% during the same period.  Other firms reliant on the PC struggled as well.  Intel Corporation (NASDAQ:INTC)’s quarterly earnings dropped 27% year over year.  Revenues fell 3% versus the prior year’s fourth quarter, and the company expects another 6% in revenues for the current quarter.  For the full-year, revenues and earnings per share dropped 1.2% and 11%, respectively.

Companies that focus on the trend toward mobile solutions, such as semiconductor company QUALCOMM, Inc. (NASDAQ:QCOM), are the favorite of many growth-oriented investors these days.  Indeed, Qualcomm has performed very well recently.  Qualcomm is a $109 billion behemoth that has seen its share price rise more than 20% since the beginning of 2012.  Qualcomm has raised its dividend by more than 12% compounded annually over the last five years.  Furthermore, in its 2012 annual report, the company announced revenues and diluted earnings per share increased by 27% and 39%, respectively.

Reasons for Optimism

I’ve written previously on why I own Intel:  primarily that I believe it to be a stretch to say that the PC is dead, particularly at the enterprise software level where Microsoft Corporation (NASDAQ:MSFT) dominates.  In addition, I take comfort in Intel’s fantastic financial position and big dividend yield, both of which are true of Microsoft Corporation (NASDAQ:MSFT) as well.  To illustrate Microsoft’s spectacular balance sheet, the company is one of only four U.S.-based companies that holds a triple-A credit rating from Standard & Poor’s.

At the end of its most recent fiscal quarter, Microsoft had $68 billion in cash and short-term marketable securities on its balance sheet, amounting to slightly more than $8 per share.  If you back out the cash & equivalents, the stock is trading for less than 10 times its fiscal 2012 diluted earnings per share.  As a result, investors are getting a pretty cheap stock.

Furthermore, Microsoft has accelerated its policy of returning cash to shareholders.  The company has more than doubled its dividend over the last five years, and the company bought back almost $3.3 billion in shares during the first six months of fiscal 2013.  At current prices, the stock yields 3.35%, more than 130 basis points better than the ten-year Treasury bond.

The Bottom Line

Microsoft has a high yield, a solid share buyback program and a great balance sheet.  The company’s operative performance has been disappointing lately, but with a cheap valuation, the stock affords investors a margin of safety.  I’ll be placing Microsoft on my watch list, and will consider purchasing shares if the company can reverse its revenue and profit declines.

The article Is Microsoft a Buy? originally appeared on Fool.com and is written by Robert Ciura.

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