Microsoft is mostly known for the hugely successful software franchises of Microsoft Windows and Microsoft Office. It is the world’s largest software company by revenue.
Microsoft’s business segments are basically broken up into four areas:
- Windows - The windows operating system generates roughly 28% of the company’s revenue (FY2010). Windows 7 was the fastest selling operating system in history which was released in 2009. Most customers of Windows are customers that are upgrading from a previous version.
- Server and Tools - Approximately 24% of revenue (FY2010), this division produces the Windows Server and other server products, tools and services.
- Business - This division produces the other ubiquitous software product of Microsoft, the Office Suite. Bing, Microsoft’s search engine is also a part of this division. The business division accounts for roughly 30% of the company’s revenue (FY2010).
- Entertainment & Devices - This division produces the Xbox system, the new Kinect and the Windows Mobile products. While Microsoft has struggled in the mobile phone industry, the new Kinect system is a major hit. This division produces roughly 13% of revenues (FY2010).
Microsoft is essentially a massive cash cow. It’s Windows and Office products continue to dominate market share around the world, despite what you might think of headlines and the cult following of Apple. In fiscal year 2010, Microsoft generated $62.5 billion in revenue and locked in $18.8 billion in net income.
Microsoft has been distributing a quarterly dividend to investors since 2004 and has raised the dividend every year since. The $24 billion in operating income in 2010 was more than enough to fuel dividend payouts of $4.6 billion and share buybacks of $8.96 billion. Furthermore, Microsoft has a massive cash war chest, so it is very likely that Microsoft continues to increase the dividend payouts for the foreseeable future.
Microsoft is not without risks. Piracy is a major concern in countries like China where something like 90% of copies of Windows are pirated. I don’t view software like Google Docs as much of a threat to Microsoft Office which seems like as much of an entrenched software system as any in the business world.
The company has struggled to find that next hit after Windows and Office, and while Xbox is a success, part of the problem is just the sheer size of the company where to develop a product that actually succeeds on a scale that drives real revenue and profit growth, it has to be huge.
Microsoft is definitely viewed as a company behind the eight-ball in innovation in areas like mobile devices, tablets and the web with regards to search (Bing) and social media.
Despite the risks, Microsoft is a very safe, income-generating place to park your money. Because the dividend yield isn’t extremely high, I’m going to be picky in where I enter my MSFT position.
I’m buying Microsoft under $20 a share. I’m backing up the truck big time at anything under $15 / share.
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