As you might have read about it here, I now do live webinars and certainly have fun doing so. I have been surprised by the positive interest attendees had towards many of my stock picks. This is how I came to the idea of sharing here some of my “Video of the Week”, during wich I go through a company recent news or results and explain why I believe it is currently a good or a bad pick for a dividend investor.
Video
Verbatim
00:00 Mike McNeil: Hi, everyone. This is Mike McNeil from the Dividend Guy blog. And welcome to this stock pick of the week. Hope you’re doing well. I just came back from a week off in Guatemala. I took some time to think about my business, relaxing on a hammock by the Lake Atitlán. It was a great experience. First thing I did when I came back is I bought myself a new PC, a new camera, and here I am in HD about to tell you about one of my favorite techno stock. First, small disclaimer. Everything that you get from this video or from Mike McNeil under the Dividend Guy blog is for informational and entertainment purposes only. I am not your broker or your personal advisor, therefore, you cannot sue me if you’re losing money from my stock ideas. On the good side of things, you don’t have to pay me a dime either if you’re making money.
00:49 MM: So now, let’s talk about Microsoft, an old tech that has successfully transformed his business model going into growth mode again. A lot of people will tell me, “Well, Mike, 40% of Microsoft business is still linked to personal computer.” You’re right. Last quarter showed a revenue growth of 2%, which is kind of boring. PC sales are sluggish. A lot of people think even that my children in 10 years from now, won’t even use a PC to work. So why the hell I’m talking about Microsoft today as a growth company? Well, the thing is, this segment will probably continue to generate strong cash flow year after year for several years to come. They have also integrated the video game business inside this division. So all the cool kids playing with Xbox, and Xbox Live are making Microsoft richer. I think that the video game industry will be a growth vector. It’s a healthy and profitable game industry. There aren’t many players. Actually, you can think about PlayStation and Xbox.
01:53 MM: A few people still use the Wii from Nintendo, but the bulk is going towards those two players. So in other words, Xbox is there to stay, and it will grow in the upcoming years. Where it gets very interesting is when we’re talking about the second largest segment of Microsoft, which is the productivity business. This part is including is Office 365 suite. And a few years ago, a lot of people didn’t notice that, but Microsoft did something very clever. They switched from a one time software sell business to a subscription one. The main difference is that now, people are paying yearly subscriptions to get access to Office 365. We tend to forget about it. It becomes like a cellphone bill that they pay on a yearly basis. Therefore, on short term, it adds the revenue because the subscription is a lot cheaper than paying for the full Office Suite one time sales software. But the good thing is, now it is being paid every year, so Microsoft doesn’t have to convince its existing client to pay more money for basically the same software with just smaller rates.
03:09 MM: The second thing here, the reason why productivity segment showed 25% revenue growth during Q2 of 2018 is because they have integrated a lot of new solutions in their business model for businesses. We all know that Microsoft has a strong bond with corporate America. A lot of people are saying, “Well, this is already there. Microsoft is already their provider for many services. What new can be done? What else can be developed?” Well the thing is, Microsoft is spending a lot of money on acquisition and developing their own services. So now, they’re able to integrate services like LinkedIn, Skype, and Teams, which is the Microsoft response to the popular workspace slot. So what it meant, the team’s application now accounts over 200,000 people using it. And this number keeps growing. So basically instead, for a company that wants to improve its productivity and looks for other solutions, they don’t have to deal with five, 10, 15 providers anymore. They can just call Microsoft, and get all their services from the same place.
04:27 MM: So integration is a big game over there. I’ve decided to teach the icing on the cake for the last point, which is the Cloud business. The Cloud is the buzz word around the tech industry for the past three years. And Microsoft has additionally benefited from it. First, they have built Azure, which is the public number two Cloud service behind Amazon AYS services. A lot of people are saying, “Well if Amazon is so dominant in this field, is there room for others?” Well, actually, Amazon proved that there’s a lot of margins in this business, so a lot of profits to be made. So there’s definitely plenty of room for other large players like IBM, Google, and Microsoft. The thing with Microsoft is that Azure has posted 10 consecutive quarters with 90 plus revenue growth quarter to quarter increased. So basically, this service is doubling its size every year right now for the past three years. So it is quite impressive, and there’s definitely more room in this business.
05:42 MM: The second sub segment is basically all the Cloud services offered to businesses. Microsoft has over 800 case studies on their website showing how they have held businesses moving towards a Cloud-based solution. So then again, their strong bonds is working for them and the cloud era is going to grow for another decade easily. Speaking of growth, we are a very far away from what Microsoft used to be at the time of Bill Gates. You remember that a long, long time ago, in a galaxy far, far away, Bill Gates told us back in 2000, that Microsoft would probably never pay a dividend because it was focused on growth. Well then, it has been 14 consecutive years with a dividend growth and we’re not talking about a 2-3% growth, we’re talking about 82% total growth in the past five years. So we are looking at a strong company, which is a leader in its industry that has strong growth vector and still has a lot of money to spend on shareholders. Their payout ratio is below 40% right now, so you can expect double digit dividend growth for the next 10 years, which is quite awesome if you’re looking for future revenues.
07:06 MM: Right now, the stock may seems to be overpriced. I’ve heard that song before, I’ve actually picked up shares around $75 bucks back in September/October 2017. People were saying,”Oh, just wait until Microsoft drops to $55 or $60 bucks.” Well, guess what? Those people are still waiting. On my side, the stock is now around 80,000, sorry $80, $90, I get confused with the numbers. So the stock is now at $90-ish, the dividend is keeps going up and I’m making a lot of money. I wouldn’t be surprised that Microsoft would hit $100 by the end of 2018, due to this strong business model.
07:53 MM: If you want to know more about Microsoft or get notified with more videos, just in the blog, follow the line, subscribe to my newsletter, the Dividend Guy Blog newsletter. Each month, I will be producing a free newsletter, you’ll get few contents and if you’re a regular on YouTube, just subscribe to my channel and then you’ll be aware of my weekly stock pick. This was Mike McNeil from the Dividend Guy Blog and happy trading.
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