Microsoft Is Showing Dividend Investors The Money – MSFT

Today’s dividend stock is a household name that everyone has heard of. The company that I would like to look at is Microsoft Corporation (MSFT). The brainchild of Bill Gates is the king of the software market. Microsoft’s Windows operating system has over 90% of the market for client operating systems. The company has been around since 1975 and is valued at just under $215 billion dollars.

Microsoft makes money on everything related to technology. If you want to use technology for educational purposes, then Microsoft offers Microsoft Word, Excel, Powerpoint, and Tools. If you prefer to use technology for fun and gaming then Microsoft has the Xbox 360 and the Zune. Microsoft has successfully entered into the search market with its Bing search engine and the company is planning to enter the smartphone market with its Windows Live.

Microsoft’s chief competitors are Apple and Google. Apple has developed its own operating system and is trying to steal market share from Microsoft. Apple owns the MP3 market with its wildly popular iPod. Google is the king of search and has lost market share to Microsoft’s Bing. Google’s Android smartphone operating system is one of Windows Live chief competitors.

The tech firm is on pace to earn over $60 billion dollars for the year. The company expects to earn $24 billion dollars in operating profit and $18 billion dollars in net income. Revenue grew 22% over the past quarter. Microsoft has turned many of its early shareholders ad employees into multimillionaires.

Like other technology companies, Microsoft has an incredible balance sheet. The company is flush with cash wit $36.5 billion dollars on the balance sheet and $24 billion dollars in cash. Microsoft has just $6 billion dollars in debt. The company has impressive margins. Microsoft has a 40% operating margin and 30% profit margin. Return on equity is 43.75% and return on assets is 18.8%.

Mr. Softy is finally raising its dividend. Microsoft announced that the company will be increasing its dividend 23% to 64 cents per share. The software giant has finally found something to do with its nearly $37 billion dollar cash hoard. Microsoft is currently yielding 2.60%. This is substantially above the average 5 year historical yield of 1.80%.

The stock looks like a reasonable value. Shares currently trade for 9 times earnings and the company has been able to grow earnings at an 11% clip over the past five years. This is below the industry average P/E ratio of 14. The stock trades at just 1 times price to earnings growth. Microsoft is making the transformation from a company that belongs in the portfolio of a growth investor to an income investor’s core holding

An Energy Stock With A Juicy Dividend

There was a time that the financial industry offered some of the best dividends around. Sine the banking crisis of the past three years, dividend yields have gone kaput in the finance industry. You can still however find some solid dividends in one industry. How would you like to invest in a company that operates in a stable industry and pays great dividend? Utility companies are known for their consistent revenue streams and growing dividends. Let’s take a look at one company in this sector.

Entergy Corp (ETR) is a Fortune 500 company that operates in the electric power production industry. Entergy is a diversified energy company that primarily operates in the Midwest with locations in Arkansas, Louisiana, Mississippi, and Texas. The company has nearly 3 million customers that rely on its 30,000 megawatts of electricity. Entergy is the second largest nuclear power generator in the United States.

Entergy is making a lot of smart moves. The company owns a number of attractive assets including its nuclear power plants. Entergy is considering spinning these assets off into another company. The company is investing $5 billion dollars in share repurchases and dividends over the next few years. All of these moves should provide value for shareholders.

One of the primary advantages that energy companies have is their pricing power. They have the ability to raise rates on customers due to few competitors in most markets. The energy industry is extremely capital intensive and takes years to become a viable presence in a new market. It is also a heavily regulated industry by states and the federal government.

So, what kind of shape is Entergy in? The company has earned $3.3 billion in free cash flow and has $1.3 billion in cash on the balance sheet. The company has a huge debt burden of $11.85 billion. This is not uncommon since most energy companies have large amounts of debt on their balance sheets. Entergy has seen its earnings grow 9.7% over the past five years. The company had over $1.3 billion dollars in net income last year and has brought in over $1 billion dollars in net income over the past three years.

Shares of Entergy currently trade at 11.6 times the current year’s earnings. Utility companies are known for their low P/E ratios. Entergy’s P/E ratio is slightly lower than the sector’s average. Shares trade at 2.2 times projected earnings growth which may be high but is still below the industry average of 2.7. The stock is trading at 1.6 times book value.

The company recently boosted its dividend 11% to $3.32 per share. The current dividend payout is 4.2% which is higher than the 5 year average yield of 3.1%. Entergy currently pays out 46% of earnings via dividends.

I think that Entergy is an attractive buy right now. The stock is not expensive and dividend investors are getting a juicy dividend yield. The company should conservatively be able to generate 5% earnings growth over the next few years. It’s a nice defensive play that will help you ride out a turbulent market.

A Small Cap Stock That Pays Big Dividends

Who knew that there was money in trash? Chances are good that you have never heard of US Ecology (ECOL). US Ecology is a small cap waste management company that disposes of radioactive and hazardous waste materials.  The company has been around providing its waste treatment services since 1952. US Ecology has a market cap of $240 million dollars and an enterprise value of $207 million dollars.

US Ecology has a solid balance sheet for a small cap stock. The company has $32 million dollars in cash and has just $15,000 in long term debt. US Ecology generates nearly $30 million dollars in free cash flow. The company has a profit margin of 10.8% and an operating margin of 17.4%. The company has a return on equity of 11.8% and an 8.6% return on assets.

The company was affected by the economic recession and the expiration of a large Honeywell contract. The Honeywell project contributed nearly 10 cents to the company’s bottom line. The company saw revenues drop from $175 million dollars to $132million dollars from 2008 to 2009. Sales have declined 6.6% over the past years.  Earnings declined 34% over the last quarter. There is however good news for the company. Sales are projected to grow for the first time in awhile. Sales growth is estimated at 33% for the current quarter. The company has seen 7% sequential growth in its base business.

Shares are valued pretty reasonably. The stock currently trades at 22 times the current year’s earnings. This is higher than industry competitors whose stocks trade at a P/E ratio in the mid teens. That’s not a high P/E ratio for a stock with an expected growth rate of 20% over the next five years. AT $13.20 per share, the company trades at a price to earnings growth of 1. The stock trades at 2.3 times sales and 2.6 times book value.

US Ecology has fallen into the range of a high yielder. The stock is barely above its 52 week low of $12.98. The company pays a 72 cent dividend which is a 5.5% dividend yield. The current yield is substantially higher than its 5 year average dividend yield of 3.6%. The only concern would be the dividend payout rate. The current dividend payout rate is 118% of this year’s projected earnings and 100% of next year’s earnings. This is obviously unsustainable. Either the company will have to meet its 20% growth rate forecast or will have to cut its dividend.

While I like the long term growth prospects of US Ecology, a dividend cut does appear more and more likely.

Dividend List Update – Sept 8th

The dividend lists have been updated for September. All stock data is current as of September 7th. The premium content is available to members only.

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