One of the great 7 stocks, Microsoft Corporation MSFT is part of the $3 trillion club as its shares have seen an impressive run in recent years. However, after hitting a record high on July 5, MSFT stock has underperformed the S&P 500 this year (+15.9% vs. +18.1%).
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But will Microsoft’s recent share buyback program boost the stock price and provide an ideal entry point for potential buyers? Let’s see –
Microsoft shares – share buyback plan
Microsoft recently approved a share buyback program, a shareholder-friendly initiative. Microsoft’s new $60 billion share buyback program is the third largest this year after $100 billion in share buyback authorizations and $70 billion by Apple Inc. AAPL and Amazon.com, Inc. AMZN or
NVIDIA Corporation NVDA and Meta Platforms, Inc. META had previously approved $50 billion worth of share buyback programs. However, Microsoft’s new share buyback program was its largest buyback program to date (read more: NVIDIA approves $50 billion share buyback: time to buy?).
Share buyback – A good sign for Microsoft
Microsoft’s share buybacks indicate that the company’s board of directors is confident about future business developments.
The buyback program aims to have Microsoft purchase its outstanding shares and reduce the number of shares available on the open market. This, in turn, would increase the value of the remaining shares, which would be a boon to Microsoft shareholders.
Microsoft decides to engage in a share buyback to increase earnings per share (EPS) relative to the stock price. Microsoft stock is currently trading above the 200-day moving average (DMA), indicating a long-term uptrend.
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Key tailwinds for MSFT: Azure growth, strong return on equity, dividend increase
Microsoft’s coveted Azure and cloud services business delivered 29% year-over-year revenue growth in the fourth quarter of fiscal 2024. Azure’s growth strengthened Microsoft’s position in the highly competitive cloud computing market, which is primarily dominated by Amazon Web Services (AWS).
Microsoft has already spent $55.7 billion on its cloud business in fiscal 2024 and plans to increase its investments as Azure has gained momentum. The Azure cloud infrastructure unit is growing faster than AWS, and if the trend continues, Azure could soon be the industry leader. In 2019, Azure was half the size of AWS, now it’s three-quarters! As a result, the Zacks Consensus Estimate for MSFT’s earnings per share has increased 5% annually from $13.04.
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Microsoft is adept at generating profits and has made the most of the capital invested by shareholders. After all, Microsoft’s return on equity (ROE) is 36%, almost on par with the computer and software industry (36.1%). Anything above 20% is likely to be considered very strong.
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Microsoft has a strong cash balance of $75.54 billion (as of June 30, 2024), which would help the company pay down its debt and grow shareholders’ wealth through dividends. Microsoft recently announced a quarterly dividend of 83 cents per share to be paid on December 12, 2024, which is 10% higher than the previous quarter’s payout. Microsoft’s dividend payout has grown by nearly 10.3% over the past five years, indicating a solid business model.
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Buy, hold or sell MSFT shares?
The introduction of a share buyback plan, the possibility of Azure following AWS’s lead, and the generation of guaranteed income through dividends should entice anyone to buy MSFT shares.
However, MSFT stock is expensive. Its price-to-earnings ratio is 33.3 times, while the broader S&P 500’s price-to-earnings ratio is 23.8 times.
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Therefore, it is advisable for smart investors to wait for the right moment to buy MSFT shares and not to over-extend their pockets. Those who have invested in MSFT shares should hold onto them as Microsoft is a blue-chip company with a long track record. Currently, Microsoft has a Zacks Rank #3 (Hold). You can find the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here.
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