Investment decisions are always based on a simple rule; go for the one which pays more. Typically people like to invest where the return is pretty decent and the rate increases faster than inflation. One such stock that people prefers is Microsoft (MSFT). The reason is pretty simple, in spite of its volatility, the stock pays big returns.
The stock has seen both highs and lows. Between 2001 and 2007, MSFT’s share prices were overvalued. However, it became significantly undervalued in 2008 and remained so throughout mid-2010 to late 2013. It is, however, difficult to predict whether Microsoft will trade at a premium P/E higher than 15 because of the overvaluation period between 2001 and 2007. The experts predict its earnings to grow at a rate of 8.5% for the next 5 years. With a yield of 2.8%, that is an estimated return of approximately 11%. That is not bad at all for a blue chip company with a S&P Credit Rating of AAA.
Since 2010, Microsoft has raised its dividend from $0.13 to $0.28 per share per quarter. This accounts for a compounded annual growth rate of nearly 29%. This more than made up for the dividend freeze which lasted 2009 to 2010. Simultaneously Microsoft’s payout ratio went from about 25% to nearly 38%. If Microsoft wants its payout ratio to remain the same, and if the earnings estimate of 8.5% in the near term materializes, then, Microsoft shall continue to raise its dividends around 8% annually.
The analysts do not expect Microsoft to have significant capital appreciation in the near term because the multiple expansion has already occurred. The stock has a P/E of 15. The stock is however expected to continue growing its dividend at a steady rate of 8%. Since this rate is higher than the rate of inflation, the investors must keep holding their current MSFT shares and reap the benefits of a steady business growth. The current return is also quite high and any addition or reduction in portfolio might do some serious damage to the overall invested amount. The investor must hold the shares as long as the return is higher than inflation.
