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Topic: Blue Chip Stocks

Blue chip stocks: The cloud powers Microsoft past Nokia stumble

Microsoft

Today, we examine one of the giants of the tech world. Microsoft has demonstrated one of the most important qualities of a blue chip stock: the ability to absorb a setback in business and still continue to grow. The 2014 purchase of Nokia ultimately forced Microsoft to take a big writedown. But the company is growing rapidly in other areas, especially cloud computing. At the same time, Microsoft continues to enrich investors with share buybacks and a dependable dividend yield.

For a recent report on a U.S. blue chip stock in the financial world, read Wells Fargo looks to takeovers to deliver more customers, higher dividends.

MICROSOFT CORP. (Nasdaq symbol MSFT; www.microsoft.com) is the world’s largest software company. Its Windows operating system powers about 90% of the world’s personal computers.

Microsoft’s other main product— its Office suite, which includes a word processor (Word) and spreadsheet program (Excel)— controls 90% of this market.

Over the past few years, Microsoft has expanded into computer-hardware products, including its Xbox video game console and Surface tablet computer.

Thanks to its expanding hardware businesses, Microsoft’s revenue rose 33.8%, from $69.9 billion in 2011 to $93.6 billion in 2015 (fiscal years end June 30). Excluding unusual items, earnings rose 0.1%, from $23.15 billion in 2011 to $23.17 billion in 2012. Per-share profits gained 1.1%, from $2.69 to $2.72, on fewer shares outstanding.

Earnings then fell to $22.5 billion (or $2.65 a share) in 2013 and slipped to $21.9 billion (or $2.65 a share) in 2015.

The company bought Nokia’s mobile phone business for $8.0 billion in April 2014. However, the purchase has not worked out as well as Microsoft had hoped, due to intense competition from the Apple iPhone and Android-powered devices. As a result, the company recently wrote down its handset business by $7.6 billion.

Meanwhile, Microsoft continues to shift from selling software as a one-time purchase to doing so by subscription. That gives it steadier revenue streams and cuts its reliance on cyclical computer sales.


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Blue chip stocks: Microsoft authorizes a new $40-billion share buyback plan

Another big part of Microsoft’s growth will come from cloud computing. Its offerings include its fast-growing Azure service, which helps businesses set up their websites and databases. Microsoft aims to increase its annual cloud-services revenue from $8 billion in fiscal 2015 to $20 billion in 2018.

To support these new services, Microsoft spent $12.0 billion (or 12.9% of its revenue) on research in 2015, up 5.8% from $11.4 billion (or 13.1%) in 2014.

The company’s strong balance sheet will let it keep investing in new projects. As of June 30, 2015, it held cash of $96.5 billion, or $12.03 a share. Its long-term debt of $27.8 billion is a low 8% of its market cap.

Microsoft is also using its strong cash balance to repurchase more shares. In October 2013, it authorized a new $40-billion buyback plan. There are no time limits for these purchases. As of June 30, 2015, it could still buy back $21.9 billion worth of stock.

The high U.S. dollar will dampen the contribution from Microsoft’s overseas customers, which supply 54% of its revenue. Even so, its fiscal 2016 earnings should improve to $2.72 a share, and the stock trades at a reasonable 15.8 times that estimate. The $1.24 dividend yields 2.9%.

Recommendation in Wall Street Stock Forecaster: BUY

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