DRIP Investor Boosts Microsoft

02/21/2003 12:00 am EST


Charles Carlson

Editor, DRIP Investor

Charles Carlson is widely considered the financial community's leading expert on DRIPs--or dividend reinvestment plans. One company which has just instituted such a plan--in line with the initiation of its first dividend--is Microsoft.  Here's Carlson's overview of the software company from his newsletter, The DRIP Investor.

"Microsoft (MSFT NASDAQ) made headlines when it announced that it will begin paying a dividend. What didn't make headlines, but is especially significant for DRIP investors, is that the company is implementing a direct purchase plan. The dividend makes a lot of sense. First, the company is sitting on a pile of cash--some $43 billion at the end of 2002. Over the years, Microsoft has said that it liked having that cash hoard in light of the uncertainty surrounding the antitrust investigation. However, now that many of those issues are coming to a close, the firm probably felt more comfortable initiating a dividend. Also, remember that Microsoft was the only member of the Dow Jones industrial average not paying a dividend, and that may have come into play in its decision. Of course, Microsoft's new annual dividend of $0.08 per share, to be paid on post-split shares March 7, is not exactly giant. Indeed, based on the dividend, the stock yields a paltry 0.3%. However, my expectations are that you'll see pretty sizable dividend growth over the next several years.

"The more important question for investors is the following: Is Microsoft worth buying? I think the answer is yes. The stock is down sharply from its 1999 high of nearly $120 a share and is offering one of the best buying opportunities in years. To be sure, the near-term climate for technology stocks is not bullish. The company recently said that revenues for the March quarter and the fiscal year ending in June would be below analysts' estimates amid a persistent slump in information technology spending. However, what I like about Microsoft is that the firm has been able to continue to boost sales during a tough period. Revenue in the December quarter was $8.54 billion, up 10%.

"The company continues to make headway in expanding its businesses outside its operating system, and this should help profits down the road. The company should earn around $1.90 a share in fiscal 2003, giving the stock a p/e multiple based on fiscal 2003 earnings of 26. While that multiple is not cheap, it is certainly not expensive for a company showing good revenue growth. Further, if you back out Microsoft's cash--which amounts to roughly $8 per share--the p/e drops to a more reasonable 22. The 52-week low is around $41, and it is possible that the stock will retest that level. However, I would feel very comfortable buying the stock at current prices and stepping up buying on declines to the mid-40s."

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