Dividend Farming Scorecard: Microsoft (MSFT)

Fifteen of the past 20 years of my career have been spent working in the technology industry.  Despite that service, I hold no investment positions in firms distinctly categorized as technology organizations.  There are a couple of index funds I have in 401Ks that hold technology stocks, but I have no individual technology holdings on the stock Dividend Farm.

Since I’m investigating possible adds to my portfolio, I thought I’d look at Microsoft to see how well it might fit my selection criteria.  I chose MSFT because it has a reasonably long history of paying dividends.

The table below offers a summary of the criteria I explore within my selection process as applied to Microsoft on January 11, 2019.  Financial data was sourced from Yahoo.Finance.com.  The dividend history is courtesy of DRiPInvesting.org.

FACTOR	TARGET METRICS	COMPANY
CCC List	Champion	Contender
Current Yield	4.0%	1.7%
Company Profile	Red Flags	None
Industry Leadership	Top 10	#1
Market Cap	$10 B+	$789 B+
P/E	< 20	42.3
P/B	< 2	9.2
Debt / Equity	< 1	2.0
Dividend History	25 Years	17
12 Month Price Range	Lower Half	Upper Half
Dividend Payout Ratio	< 75%	69%
Portfolio Weight	Max of Slightly Over	Under

The first column lists the major factors I review.  The middle column lists the benchmarks I’m targeting.  The last column highlights Microsoft’s metrics so I can see how well they align with my benchmarks.

CCC List: The list comprises firms found on the DRIPinvesting.org web site specified as Champions, Contenders, and Challengers.  MSFT is shown as a Contender so it’s out of the gate in good order.

Current Yield:  MSFT’s yield is currently 1.7% which means it’s less than half my target.

Company Profile:  MSFT is the world’s largest provider of business software and applications.  It’s one of the leading cloud computing firms on the planet and occupies reasonable positions in the segments of web search (Bing) and news (MSN).  There don’t appear to be minor red flags or items of great concern.

Industry Leadership:  I’m interested in companies in the Top 10 within their industry.  Gigabit Magazine listed MS as the largest software company in the world in 2018.  Microsoft’s revenue dwarfed #2 Oracle by more than 2 to 1.  It doesn’t get any more “industry leadership” than that.

Market Capitalization:  MSFT’s market cap rings in at $789 billion and change so there’s no shortage of large, solid capitalization of which to speak.

Price to Earnings:  The P/E of 42.3 is more than two times my target.  When price is outstripping earnings at this rate, there’s cause for concern on the Dividend Farm.

Price to Book:  P/B is running nearly five times greater than my target.  Consequently, a purchaser will be acquiring a lot of good will – possibly brand recognition and portfolio IP in need of serious technical talent to turn into cash and maintain viability.

Debt to Equity:  D/E is above my target by roughly 2x as well.  MSFT is primarily a software and services company in which case the debt may be for non-tangibles difficult to turn into cash.  There may not be a ton of physical assets to sell if something goes wrong.  

Dividend History:  17 consecutive years of dividends put MSFT in the Contender category which is certainly solid.

Price Range:  The price range of MSFT as of 1.11.19 stood within the upper half of its trailing 12-months (TTM) price range.  At $102.80 it’s just into my cut-off zone, trending toward the high side of its range and adding to the large P/E mentioned earlier.

Payout Ratio:  The payout ratio of 69% falls below my upper limit of 75% which means there could be room for growth.  Given the yield of 1.7%, one would hope dividend growth is on the horizon.

Portfolio Distribution:  From a portfolio standpoint MSFT would be my first technology specific holding and represent the establishment of an underweight position on the Dividend Farm.  I have no problem establishing an entirely new segment, but I’m not sure I want to do it given the metrics above.
 

Analysis: 

Since I work in the technology space, I hesitate to add a technology holding to the div farm for a couple of reasons.  First, my paycheck is drawn from the technology field.  Consequently, I’m significantly overweight in that sector from a cashflow standpoint.  Second, firms in the technology field generally don’t have significant competitive moats separating them from their competitors.  It’s common for this year’s trendy firm or technology to be superseded by another within a few years.  I plan to hold investments long term and two to three years isn’t “long term”.

With these factors in mind, a technology firm needs to offer outstanding metrics in order to be considered for the Dividend Farm.  Unfortunately, MSFT doesn’t pass the test.  As I’ll present in a future post, MSFT fails relative to more of the metrics above than do either The Southern Company or General Dynamics as previously analyzed.  Therefore, MSFT will not be added to the crops cultivated on the Dividend Farm.

The thoughts and opinions expressed here are those of the author, who is not a financial professional.  Opinions expressed here should not be considered investment advice.  They are presented for discussion and entertainment purposes only.  For specific investment advice or assistance, please contact a registered investment advisor, licensed broker, or other financial professional.