Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

How Microsoft Corporation (MSFT) Is Poised For Plenty of Capital Gains

Software giant Microsoft Corporation (NASDAQ:MSFT) has been drawing a lot of attention to itself over the last few months. First, we get the bombshell that CEO Steve Ballmer would be retiring within a year, and as though that weren’t enough, the company then drops a cool $7.2 billion on Nokia‘s handset division. While it’s arguable as to whether those two developments are positives or negatives, the company recently announced an unequivocal win for shareholders: a dividend increase and a gigantic $40 billion share buyback.

Microsoft Corporation (NASDAQ:MSFT)

That sweet yield

Dividend-growth investing is one of the safest, and most lucrative in the long haul, methods of investing. This is why investors who tend to enjoy more conservative, income-oriented investments tend to look at both the current yield as well as the company’s track record for increasing that dividend at a consistent rate. Microsoft Corporation (NASDAQ:MSFT), in true dividend-growth fashion, just announced a whopping 22% increase in its dividend–$0.28 per share quarterly, $1.12 per share on an annual basis. That’s nearly a 3.5% yield at current levels, better than the 10-year Treasury that yields around 2.8% with absolutely no room for capital gains.

What a buyback!

Great yield and cheap valuation ahead of what could be a new dawn for the company are enough to pique one’s interest, but what’s really compelling is the company just announced an eye-popping $40 billion buyback, good for roughly 14% of the shares outstanding. Not only does this boost earnings per share, but a buyback of this magnitude can introduce some serious buying pressure on the stock, which can further ignite long-term share price appreciation.

Speaking of capital gains, Microsoft is poised for plenty

While I’m a big fan of the dividend, I really view it as being paid to wait for the capital gains to come in. Look, while much has been said about how Microsoft Corporation (NASDAQ:MSFT) is “missing the boat” in mobile, or how Windows 8 is a flop, the bottom line is that only 25% of the company’s business is tied to Windows at all! The remaining portions – business, server & tools, online services, entertainment & devices – comprise the remaining 75% of the company’s revenue base.

With the current CEO on his way out over the next year (which means room for fresh new leadership and vision), coupled with a well-diversified (and mostly growing) business, and dirt cheap 7.15x EV/EBITDA valuation, it seems that the risk really is to the upside on the shares at current levels.

Windows 8.1 and the end of Windows XP support could make for a great 2014

While Windows 8 uptake isn’t great, particularly as the vast majority of PCs haven’t yet moved to touch, there is room for cautious optimism with respect to Windows 8.1. It adds back a lot of the features and functionality that many, particularly non-touch users on PCs, were missing, and at the same time makes the touch experience better.

Add to a better OS a wider and deeper lineup of devices ranging from quality 8″ tablets powered by Intel’s upcoming “Bay Trail” to a sea of “Haswell” based thin and light notebooks with excellent battery life, and Microsoft Corporation (NASDAQ:MSFT) really seems poised for share gains across the entire spectrum of computing.

Furthermore, Windows XP is set to go “end of life,” which means that it will no longer be supported by Microsoft Corporation (NASDAQ:MSFT) via updates. This could drive refresh in the corporate space, which has been softer than usual over the last year or so.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.