Ever since I used a MacBook, I rarely used Windows and Microsoft Office.
But still, as much as I like my MacBook and had switched to Google Docs, today, many of my friends continue to use Microsoft Office at work. Undeniably, many businesses and corporations remain Microsoft users and are not likely to switch to Apple when it comes to productivity. To investors, such “stickiness” would be known as an “economic moat” and thus, is an invaluable asset.
In this article, I’ll cover Microsoft’s long-term financial results, its acquisitions of key companies and valuation. Thus, the following is a list of 9 main things about Microsoft to know before investing. They are as follows:
1. Microsoft has 3 Business Segments.
The 3 segments with their key offerings are summarised as follow:
Their contributions to Microsoft’s total revenues in 2022 were “pretty even”. As such, Microsoft has a diversified business model as each of its segments is even and equal in terms of their significance to the group’s performance.
2. Microsoft’s Total Revenue Grew at CAGR of 10.4%.
Total revenues had increased, from US$ 73.7 billion in 2012 to US$ 198.3 billion in 2022. This growth is more significant in 2017-2022 due to several factors that include its acquisition of LinkedIn in 2016 and sales growth achieved by all of its key products in its three business segments listed above.
Source: Microsoft
3. Microsoft’s Net Income Grew at CAGR of 15.7%.
Overall, Microsoft’s net income has increased from US$ 17.0 billion in 2012 to a total of US$ 72.7 billion in 2022. This was attributed to its continuous growth in total revenues during the period.
Source: Microsoft
Microsoft’s Return on Equity (ROE) had risen from 20+% levels in 2012-2018 to 30%-40% levels in 2019-2022 due to its growth in net income in that period.
Calculated from Microsoft’s Financial Data
4. Microsoft’s Operating Cash Flows Grew at CAGR of 10.9%.
In 2013-2022, Microsoft generated US$ 486.1 billion in operating cash flows. Of which, the company spent:
- US$ 157.6 billion in net share buybacks.
- US$ 123.4 billion in dividend payouts.
- US$ 117.7 billion in acquisition of property & equipment.
- US$ 75.3 billion in acquisition of businesses.
Source: Microsoft
5. Microsoft Can Pay Off its Long-Term Debt in 6+ Months.
As of 31 December 2022, Microsoft’s long-term debt stood at US$ 44.12 billion. In the last 12 months, it generated US$ 84.39 billion in operating cash flows. So, Microsoft has the ability to pay off its long-term debt in ½ year if it chooses to.
Formula:
= Long-Term Debt / Operating Cash Flow x 12 months
= US$ 44.12 billion / US$ 84.39 billion x 12 months
= 6.3 months
6. Microsoft Made 5 Major Acquisitions in 2017-2022.
Microsoft is proactive in business acquisitions. Over the last 10 years, Microsoft has acquired 100+ companies. Among them, its five largest acquisitions totalled US$ 131.0 billion and they focus on networking, software, games, and AI. These acquisitions had contributed to its increase in revenue and operating income to all of its 3 business segments stated above in 2017-2022.
Source: Microsoft
7. Microsoft Had 3x its Dividends per Share (DPS) in 10 Years.
DPS had increased from US$ 0.80 in 2012 to US$ 2.48 in 2022. The increase was in tandem with its growth in operating cash flows during the period.
Source: Microsoft
Dividend yields for investors who’d invested in Microsoft after 2016 were lower. This is because Microsoft’s rise in share price in 2016-2022 has been faster than its growth in DPS during the period.
Calculated from Microsoft’s Financial Data; Stock Price from Google Finance
On 18 April 2023, Microsoft’s stock price was US$ 288.80. Based on its latest 12 months DPS of US$ 2.60, its current dividend yield is 0.90%, which is at levels in 2020-2022. Do note: such dividends are reported as “gross amount”. For all U.S. stocks, there are 30% withholding tax on dividends. So, the net dividend yield is lower than 0.90%.
8. Microsoft’s P/E Ratio Averages 28.1 in 2015-2022.
P/E Ratio for 2012-2014 was omitted for Microsoft was no longer the same firm today as it was in 2012-2014. This is because Microsoft had expanded its size of businesses and gained more capabilities in the areas of cloud, games, softwares and networking sites (LinkedIn). In 2018, Microsoft’s P/E Ratio was 45.63. It was because significantly higher income taxes were paid in 2018. Excluding them, in 2015-2022, Microsoft’s P/E Ratio averages 28.1.
Calculated from Microsoft’s Financial Data; Stock Price from Google Finance
Conclusion:
Microsoft achieved growth in revenues, net income and operating cash flows in 2017-2022 due to improved results from its 3 business segments. This company remains proactive in its business acquisition and share buyback activities. In the case for investors, the decision lies in its business results, valuation and also the valuations of other listed peers in the technology sector.
There you go, the 8 things to know about Microsoft before investing in it.
I believe it is best to first understand the educator’s mindset and skill sets when investing before signing up for a course. Thus, if you intend to earn growing and recurring dividends from your stock portfolio, you can check out the processes I use to build my own portfolio by our 1-Hour free training session as follows:
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