Founded in 1975, Microsoft (MSFT) helped launch the first great wave of information technology transformation by providing the operating software that made the PC revolution possible, explains Ingrid Hendershot, value-oriented money manager and editor of Hendershot Investments.
Microsoft parlayed its lead in PC operating systems into application software with the development of Word, Excel, Outlook and Powerpoint. Microsoft successfully entered the database software market with Access and SQL Server products.
Throughout its history, Microsoft has achieved success by taking a long-term approach and investing heavily in new and compelling products to enhance user productivity and experiences.
As a result, Microsoft now boasts leadership positions in gaming with Xbox, Internet search with Bing, collaboration with Teams, client relationship management software (CRM) with Dynamics 365, social media with LinkedIn and hardware with Surface branded devices.
In 2012, Microsoft’s leadership pivoted to the cloud with heavy investments in Azure; this franchise provides the launchpad for growth in secular trends including machine learning, business intelligence and Internet of Things, that promise to be as big, if not bigger, than previous waves of technological transformation and change.
During the past five years, Microsoft has clicked on profitable growth with revenues compounding 16% annually and EPS increasing at a 46% annual pace. During the past five years, Microsoft has booted up an exceptional 36.6% average return on shareholders’ equity with after-tax profit margins expanding and averaging north of 30%.
Microsoft generates exceptional cash flow with the company producing more than $65.0 billion in free cash flow during fiscal 2022. Microsoft returned nearly $49.0 billion to shareholders through net stock buybacks of $30.9 billion and dividends of $18.1 billion.
The company recently increased its dividend 10% to $2.72 annually. While the stock currently yields a modest 1.1%, the payout ratio of less than 30% provides plenty of room for future growth.
Overall, Microsoft — a Top Pick for 2023 — is a high-quality market leader with a history of profitable growth and exceptional cash flows with substantial cash returned to investors through growing dividends and share buybacks.