It is tempting to assume that mega-capitalized companies like Microsoft (NASDAQ: MSFT) are unlikely to outperform the market over the long term just because they are already so big. But what some investors may miss is that even a mature company can continue to reward its shareholders over the long term. Additionally, many mega-cap tech companies have some of the most important competitive advantages, making them very attractive investments.
Microsoft is a great example of a massive business that is still a good investment. Here’s why the software giant deserves a place on your watchlist – and maybe even a place in your portfolio.
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Commercial dynamics
Despite its $ 2,000 billion market capitalization, Microsoft’s business continues to grow rapidly. Indeed, it is undoubtedly still a growth stock.
Consider Microsoft’s most recent quarterly results. In the third quarter of fiscal 2021, total revenue increased $ 6.7 billion year-on-year, or 19%. Even more, this growth was widespread, with growth in every segment of the business.
The company’s cloud business revenue, or revenue from Microsoft 365, Azure, and Dynamics 365, grew 33% year-over-year to $ 17.7 billion. In addition, the gross margin of this rapidly growing segment increased three percentage points year-on-year to 70%. Microsoft’s cloud computing company Azure saw its revenue increase by 50%.
With powerful and important catalysts like this, Microsoft looks poised to experience robust growth rates for years to come.
A promising dividend
Unlike some growth stocks that still have failed to generate profits, Microsoft wastes heaps of money – enough to pay its shareholders a solid dividend.
An impressive $ 0.34 of every dollar in Microsoft sales was free cash flow, or the money left over after factoring in regular operations and capital expenditures. This cash flow is the good thing that management can save for future acquisitions or use for share buybacks or dividends. Indeed, Microsoft paid out $ 16.1 billion in dividends to shareholders in the past 12 months ending March 31.
Of course, Microsoft’s 0.9% dividend yield may seem low. But this is a growing stream of income. The company’s quarterly dividend of $ 0.56 is up from $ 0.36 just five years ago. In addition, there are good reasons to expect stronger dividend growth in the future; the company currently pays only 30% of its free cash flow as dividends, leaving plenty of room for annual dividend increases.
With all of that in mind, the stock still seems like an attractive investment – even at 35 times earnings and near its all-time high of $ 263.
This article represents the opinion of the author, who may disagree with the “official†recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.
