Microsoft Investors Get Quarterly Dividend Raise as Roller Coaster Ride Continues

Witawat (Ed) Wijaranakula, Ph.D.
Wed Sep 16, 2015

Microsoft [NASDAQ:MSFT] shares closed on Wednesday at $44.30 a share, up 0.73% from the previous close after the company said its raised a quarterly dividend by 5 cents to 36 cents a share, to be paid out in December. The dividend increase came as no surprise as some investors look at MSFT as a high quality dividend stock and expect an increase every year around this time. This may be one of the reasons that investors still hang onto the stock, despite that it has been stuck in a trading range for almost a year-and-a-half. 

Microsoft shares have been on a roller coaster ride since July 2014, when newly appointed CEO Satya Nadella sent a company-wide email to all employees outlining his top agenda of reshaping the company and telling them that changes were coming to Microsoft. One week later, Microsoft announced that it cut 18,000 jobs, or 14% of company, the largest layoff in its history. 

Almost one year later in June 2015, another email was sent to employees, laying out a broad agenda for the new fiscal year and set the stage for the upcoming Windows 10 launch and revealing the company’s new official mission statement, to “empower every person and every organization on the planet to achieve more”. The email was a follow-up to an announcement a week earlier that four of Microsoft’s key executives were leaving the company and would be replaced by top lieutenants of Nadella.

Since Mr. Nadella was appointed as Microsoft CEO on February 4, 2014 until this Wednesday, MSFT shares have climbed just 26.84%, excluding their 3% plus dividend, slightly better than the performance of the NASDAQ 100, which registered a gain of 27.11% during the same period.

Microsoft stunned investors, during their earnings report in late July, with a massive loss of $2.1 billion for the fourth quarter of its 2015 fiscal year due to a $7.6 billion write down for its Nokia purchase last year. Excluding the write down and related charges, Microsoft earned a profit of $6.4 billion on $22.2 billion in revenues. 

The company said that its Devices and Consumer revenue declined 13% to $8.7 billion in the fourth quarter. Windows OEMs declined 22% but revenue from Microsoft's Surface tablet grew 117% to $888 million, driven by sales of the Surface Pro 3 and the newer Surface 3. Microsoft's smartphone business grew 10% year-over-year to 8.4 million units, but lower average selling prices led to a revenue decline of 68%.

Total Xbox revenue grew 27% based on strong growth in consoles, Xbox Live transactions and first party games. Search advertising revenue grew 21% with Bing U.S. market share at 20.3%. Office 365 Consumer subscribers increased to 15.2 million, with nearly 3 million subscribers added in the quarter.

Commercial revenue from Microsoft's Business Solutions, which includes Microsoft's Dynamics unit, a rival to Salesforce [NYSE:CRM] customer relationship management service (CRM) and enterprise resource planning (ERP), increased slightly to $13.5 billion. Commercial cloud revenue grew 88% driven by Office 365, Azure and Dynamics CRM Online and is now on an annualized revenue run rate of over $8 billion. 

The company said that server products and services revenue and Dynamics revenue grew 4% and 6%, respectively. Office Commercial products and services revenue and Windows volume licensing revenue, on the other hand, declined 4% and 8%, respectively. Microsoft didn’t disclose the actual revenue figures to its investors, so no one can tell whether these revenues were good or bad.

Microsoft highlighted its high-growth businesses, including the Surface tablet with a new Surface Pro 4 set to launch in early October. In November, Apple [NASDAQ:AAPL]will start shipping a new iPad Pro with shipments to be between 2.5-3 million units in the fourth quarter of 2015, according to Digitimes Research. We expect that Microsoft will lose some of that revenue due to competition from the iPad Pro.

The prospect of a Xbox One console price war with Sony PlayStation is looming as Sony Corp. [NYSE-ADR:SNE] announced this week that it is cutting the price of its PlayStation 4 in Japan, starting October 1 by about 13 percent. The Xbox One is now priced at $349, while the PS4 sells for $399. According to Statista, Sony sold 13.92 million units of PlayStation 4 in 2014, while Microsoft shipped 7.83 million units of Xbox One.

While the cloud business is becoming Microsoft’s fastest growing segment with an annualized revenue approaching $8 billion, Microsoft has not disclosed profit information as the Azure platform is facing fierce competitors, such as from Google [NASDAQ:GOOGL]. Google announced in May that it slashed more prices on its cloud platform by 30%, putting new pressure on rival AWS and Microsoft. In response, Microsoft is offering $10,000 a month of Azure credits for one year, which began on July 1, for start-up companies that qualify for its Microsoft BizSpark Plus program. 

Despite the price war, Microsoft could continue experiencing huge growth opportunities as Office 365 has now overtaken Google Apps as the number one cloud-based office productivity software, according to cloud security firm Bitglass.

From our technical viewpoint, MSFT has been trading in a symmetrical chart pattern, a trading band between $48.74 and $39.60 a share, since mid-2014 as investors can’t decide whether Nadella can return Microsoft to growth. According to the Financial Times, the consensus forecast amongst 34 polled investment analysts covering Microsoft gave the company an Outperform rating with a price target of $52 a share. 

According to Goldman Sachs analyst Heather Bellini, Microsoft is facing currency headwinds and weakness in commercial licensing over the next three fiscal years. Microsoft's commercial licensing segment, which sells software and services like Office, Office 365, Exchange, and SQL Server to large corporations, and makes up more than a third of Microsoft's overall revenue, continued to see a downward trend in the fiscal fourth quarter. 

Disclosure: Portfolio holds long position in AAPL. No position in MSFT or any other companies mentioned.

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