The Windows Operating System, developed by NASDAQ-listed Microsoft Corporation (NASDAQ:MSFT) is a runaway leader in terms of market share of desktop operating systems – at 77.21% as at August 22020 (statistics from statcounter GlobalStats.)

Apart from its operating system, another software suite – Microsoft Office, should be familiar to you as well – where just about every company here in Singapore make use of this software.

Besides software, Microsoft is also the manufacturer of the Surface tablet, XBOX gaming console, along with social networking site for professional network – LinkedIn (which Microsoft Corporation acquired back in 2016.)

So, in terms of investment, does Microsoft Corporation make a good addition to your long-term investment portfolio? The best way to answer this question is to look at the company’s historical financial performance (my preference is to invest in a company that is able to grow its top- and bottom-line over the years), debt profile (where I prefer to invest in companies with very little or no debt) – all of which I will be sharing with you in more detail in my post about the company today.

On top of that, you will also learn about its historical dividend payout to shareholders over the years, and also whether or not at its current share price, is Microsoft Corporation considered ‘cheap’ or ‘expensive’ (based on its current vs. its historical valuations.)

First of all, some brief information about the company and its businesses…

Brief Introduction about Microsoft Corporation

From my understanding in the company’s annual report for FY2019 (for the financial year ended 30 June 2019), Microsoft Corporation operates in three main business segments:

(i) Productivity and Business Processes – which primarily comprises Office 365 subscriptions (both consumer as well as commercial), LinkedIn (one of the world’s largest social networking sites on the Internet), as well as Dynamics 365 (a unified set of cloud-based intelligent business applications for financial management, enterprise-resource planning, customer relationship management, supply chain management, and analytics management.)

(ii) Intelligent Cloud – this business segment is responsible for providing server products and cloud services, including SQL server, Windows server, Visual Studio, Systems Center, GitHub, and Azure, all of which offering developers, IT professionals, and enterprises the freedom to build, deploy, and manage applications on any platform or device. It also provides enterprise services, which assists customers in developing, deploying, and managing Microsoft server and desktop solutions, along with providing training and certification to developers and IT professionals on the various Microsoft products.

(iii) More Personal Computing – Most of us are probably very familiar with this business segment, which primarily comprises of the Windows operating system, devices including Surface, PC accessories, intelligent devices, gaming including XBOX hardware, software, and services, along with the Bing search engine and Microsoft advertising platform.

In terms of revenue contribution by the three business segments in FY2019, ‘More Personal Computing’ contributed 36.3% towards its overall revenue, ‘Productivity and Business Processes’ contributed 32.7%, and ‘Intelligent Cloud’ contributed the remaining 31.0% – Personally, it is good to note that each of the three business segments contributed evenly towards the company’s overall revenue.

Historical Financial Performance of Microsoft Corporation between FY2015 and FY2020

Microsoft Corporation’s financial year ends every 30 June.

On 22 July 2020, the company released its financial results for Q4 and FY2020, and as such, in this section, I will be looking at it’s results over a 6-year period – between FY2015 and FY2020:

Total Revenue and Net Profit (US$’mil):

Financial
Year
FY2015FY2016FY2017FY2018
Total
Revenue
(US$’mil)
$93,580m$85,320m$96,571m$110,360m
Net
Profit
(US$’mil)
$12,193m$16,798m$25,489m$16,571m
Financial
Year
FY2019FY2020
Total
Revenue
(US$’mil)
$125,843m$143,015m
Net
Profit
(US$’mil)
$39,240m$44,281m

Microsoft Corporation's Total Revenue and Net Profit between FY2015 and FY2020

The company’s total revenue over a 6-year period grew from US$93,580m in FY2015 to US$143,015m in FY2020, a compound annual growth rate (or CAGR) of 7.3%, while its net profit improved from US$12,193m in FY2015 to US$44,281m in FY2020, a CAGR of 24.0%.

Its total revenue saw year-on-year (y-o-y) increases every year except for FY2016, due to a drop in its sales of products; for its net profit, the only year which saw a y-o-y decline was in FY2018, due to a net charge related to ‘Tax Cuts & Jobs Act.’

Gross and Net Profit Margin (%):

The following is Microsoft Corporation’s gross and net profit margin which I have computed:

Financial
Year
FY2015FY2016FY2017FY2018
Gross Profit
Margin (%)
64.7%61.6%64.5%65.2%
Net Profit
Margin (%)
13.0%19.7%26.4%15.0%
Financial
Year
FY2019FY2020
Gross Profit
Margin (%)
65.9%67.8%
Net Profit
Margin (%)
31.2%31.0%

Microsoft Corporation's Gross and Net Profit Margin between FY2015 and FY2020

Looking at the company’s gross profit margin, it has been on an upward trend since FY2017. However, its net profit margin have fluctuated over the past six years I have looked at.

Return on Equity (%):

Return on Equity (or RoE), in layman terms, is a measure of profitability (in percentage terms) for every single dollar of shareholders’ money the company uses – for example, if a company has a RoE of 15.0%, it means that the company is able to generate a profit of $15 for every $100 of shareholders’ money it uses.

With that, let us now take a look at Microsoft Corporation’s RoE which I have computed:

Financial
Year
FY2015FY2016FY2017FY2018
Return on
Equity (%)
15.2%23.3%29.1%20.0%
Financial
Year
FY2019FY2020
Return on
Equity (%)
38.3%37.4%

Microsoft Corporation's Return on Equity between FY2015 and FY2020

Just like its net profit margin, Microsoft Corporation’s RoE have also fluctuated over the past six financial year.

Debt Profile of Microsoft Corporation between FY2015 and FY2020

Remember I said in the beginning of this post that one of the things I look at before I decide whether or not to invest in a company is its debt profile – preferably, I would like to invest my money into companies with very little or no debt.

In this section, I will be looking at Microsoft Corporation’s current ratio (if it is above 1.0, it means the company is able to fulfil its short-term debt obligations), along with whether or not the company is in a net cash/debt position:

Financial
Year
FY2015FY2016FY2017FY2018
Cash & Cash
Equivalent
at the End
of Period
(US$’mil)
$8,669m$6,510m$7,663m$11,946m
Total
Borrowings
(US$’mil)
$35,403m$53,461m$86,194m$76,240m
Net Cash/
Debt
(US$’mil)
-$26,734m-$46,951m-$78,531m-$64,294m
Current
Ratio
2.52.42.92.9
Financial
Year
FY2019FY2020
Cash & Cash
Equivalent
at the End
of Period
(US$’mil)
$11,356m$13,576m
Total
Borrowings
(US$’mil)
$72,178m$63,327m
Net Cash/
Debt

(US$’mil)
-$60,822m-$48,751m
Current
Ratio
2.52.5

My Observations:

  • Even though the company is in a net debt position in all the six financial years I have looked at, notice how its total borrowings have been trending down since FY2017, where it peaked at US$86,194m, to US$63,327m in FY2020
  • Its current ratio have been maintained between 2.5 and 2.9 over the years suggesting that the company is more than able to meet its short-term debt obligations

Microsoft Corporation’s Dividend Payout to Shareholders between FY2015 and FY2020

The company pays out a dividend to shareholders on a quarterly basis. However, if you are a Singaporean investing in a US-listed company, do bear in mind that all dividends that you receive will be subjected to a 30.0% withholding tax – meaning you will receive 30.0% less than what is declared.

The following table is Microsoft Corporation’s dividend per share to shareholders over the past 6 years – between FY2015 and FY2020:

Financial
Year
FY2015FY2016FY2017FY2018
Dividend
Per Share
(US$/share)
$1.24$1.44$1.56$1.68
Dividend
Payout
Ratio (%)
83.8%68.6%48.0%78.9%
Financial
Year
FY2019FY2020
Dividend
Per Share
(US$/share)
$1.84$2.04
Dividend
Payout
Ratio (%)
36.4%35.4%

Microsoft Corporation's Dividend Per Share between FY2015 and FY2020

As you can see from the table and chart above, Microsoft Corporation have been increasing their dividend payout to shareholders over the past 6 years – where it has gone up from US$1.24/share in FY2015 to US$2.04/share in FY2020 – a CAGR of 8.7%.

Another thing to note is that, even as their dividend payouts go up, its dividend payout ratio (the percentage of earnings which the company pays out to its shareholders as dividends) have been on a decline, suggesting that it is highly likely the company is able to further increase its dividend payout to its shareholders in the years to come.

Is the Current Share Price of Microsoft Corporation Considered Cheap or Expensive?

Finally, let us take a look at whether or not at Microsoft Corporation’s current share price at US$231.65 (on 02 September 2020), is it considered ‘cheap’ or ‘expensive’, based on a comparison of its current vs. its historical valuations.

The following table is Microsoft Corporation’s historical valuations over a six-year period, along with their averages, which I have computed:

Financial
Year
FY2015FY2016FY2017FY2018
P/E
Ratio
29.824.421.246.3
P/B
Ratio
4.45.56.19.2
Dividend
Yield
2.8%2.8%2.3%1.7%
Financial
Year
FY2019FY2020Average
P/E
Ratio
26.535.330.6
P/B
Ratio
10.013.08.0
Dividend
Yield
1.4%1.0%2.0%

Based on its current share price of US$231.65, its current valuations are as follows:

P/E ratio: 39.6
P/B ratio: 14.8%
Dividend Yield: 0.9% (computed based on the company’s total dividend payout of US$2.04/share in FY2020)

Comparing its current valuations with its 6-year average, it seems that at its current price, Microsoft Corporation is current trading at a premium – due to its higher-than-average current P/E and P/B ratios, along with a lower-than-average current dividend yield.

In Conclusion

So there you have it – my personal analysis of Microsoft Corporation.

To sum up, some of the things I like about the company include its growing top- and bottom-line over the past six financial years, along with its improving gross profit margin.

In terms of its debt profile, its current ratio have been maintained at above 2.0 – meaning it can comfortably fulfil its short-term debt obligations. While the company is in a net debt position in all of the 6 financial years I have looked at, its total borrowings have come down since FY2017.

Despite having said that, however, this post is by no means a recommendation to buy or sell shares of Microsoft Corporation. Please do your own due diligence before you make your investment decisions.

Disclaimer: At the time of writing, I am not a shareholder of Microsoft Corporation.

 

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