High-yield/macroeconomics (fka YIELD)

[DewDiligence]

Microsoft Offers Safety and Muscle

http://online.barrons.com/article/follow_up.html

›September 29, 2008

In your search for a safe place to stash some cash, consider Microsoft (ticker: MSFT), one of the cheapest tech plays. In case you missed it amid the crush of financial calamities elsewhere, Microsoft gave an impressive demonstration last week of its financial muscle, announcing a new $40 billion stock-repurchase plan, equal to 16.5% of the company's current market capitalization. The latest buyback follows completion of a previous $40 billion plan; Microsoft notes it now has returned $115 billion to holders in the past five years, in the form of dividends and share repurchases.

The company also announced it plans to dip its toe into the debt market for the first time, setting up a $2 billion commercial-paper program. Microsoft became the first new issuer to get a triple-A rating from Moody's since 2002. And there's more: The software powerhouse boosted its dividend by 18% and now provides investors with a 2% yield.

All this, and the company is expected to increase fiscal 2009 revenue by close to 12%, to $67.3 billion. Profits for the year could hit $2.15 a share, going to $2.42 in fiscal '10. Based on '09 estimates, the stock trades at a modest 12.6 times earnings; using 2010 estimates, the multiple is 11. Seriously, what's not to like here?

In a talk in Santa Clara, Calif., Thursday night, Microsoft CEO Steve Ballmer conceded the tech industry isn't immune to the crisis in the financial sector, but he also said tech execs still see "a certain buoyancy" to demand. In a sense, he provided the same message Oracle (ORCL) delivered a week earlier: So far, the financial crisis has not cratered demand.

Venture capitalist Ann Winblad, who interviewed Steve on stage at the Santa Clara event, noted Microsoft got more than $35 billion in revenue in its June 2008 fiscal year from two businesses- Windows and Office-that people see less as growth vehicles than as cash cows. Ballmer shot back that the two are growing by 15% to 25% a year, saying, "I'm glad to have those cows in my pasture."

There was much discussion of Microsoft's push into the advertising market; Ballmer noted it already gets more than $3 billion a year from ad sales and ranks among the world's largest sellers of advertising. He added that the company is committed to spending 5% to 10% of its operating income in the next few years on its ad business. Therein lies the biggest concern: that Ballmer may yet make another run at Yahoo! (YHOO), squandering lots of cash.

Microsoft's shares already seem to be discounting such a misstep, along with a slowdown in corporate IT spending. With the stock down 24% for the year, Redmond, Wash., might offer some shelter from the storm.‹