Microsoft: Exploring the Potential for a Stock Split in 2024

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anuv javier 3 months

Microsoft has delivered impressive growth during the first quarter of 2024, setting a strong start for the year. The recent acquisition of Activision is expected to contribute positively to the company, particularly in the devices segment, which had seen a decline over the past two quarters. With the stock up by more than 200%, and ongoing share repurchases, there's growing speculation about the possibility of a stock split in the near future. Despite its recent success, Microsoft still offers a double-digit upside to its price target.
Why Microsoft Is The Perfect Stock
Microsoft has proven itself to be a resilient investment, even in the face of challenging economic conditions. During the Global Financial Crisis (GFC), when many companies were struggling, Microsoft continued to show growth, with the exception of 2009. Notably, during the GFC, its revenue, operating income, and net income grew significantly. This resilience is a key strength, especially in light of predictions of a recession in 2024.
Furthermore, Microsoft's commitment to growth is evident in its recent acquisition of Activision. This acquisition is expected to have an immediate positive impact on the gaming segment, with projected revenue growth in the mid-to-high 50s. Additionally, Microsoft's substantial investment of $3.16 billion in Australia, focused on areas such as A.I., cloud computing, and cybersecurity, positions the company to be at the forefront of emerging technologies. Australia's favorable regulations regarding A.I. played a significant role in this strategic move.
Microsoft's growing investments in A.I. are complemented by recent deals with industry giants like Amazon, worth $1 billion, for its cloud productivity tools. This signals Microsoft's intention to lead in the A.I. space, which is becoming a focus for many businesses.
Dividend Track Record
While Microsoft's dividend track record may not be as long as some other companies, it's still impressive, with 17 years of uninterrupted dividends and 13 years of growth. In recent years, Microsoft has increased its dividend from $0.08 to the current $0.75, including a 10% increase last month. Despite increased capital expenditures, largely due to investments in A.I., Microsoft comfortably covers its dividend with free cash flow. The company's ability to cover dividends is underscored by its conservative average payout ratio of 33% over a six-year period.
In the first quarter of this year, Microsoft's free cash flow was up 22% year-over-year, totaling $20.7 billion, enough to cover the entire annual dividend amount. This financial stability positions the company as a reliable investment for income-focused investors.
Stock Split Coming Soon?
Microsoft's stock has experienced remarkable growth, with a more than 200% increase over the last five years. Historically, Microsoft has been no stranger to stock splits, having conducted several during the 1990s and the most recent, a 2-for-1 split, almost 21 years ago. While an immediate stock split isn't expected, given the need for the Activision acquisition to integrate fully, the current stock price of $333 may entice more investors if a split is eventually announced.
Microsoft's history of stock splits, coupled with ongoing share buybacks, positions the company for future splits. It's worth noting that other major tech companies like Alphabet and Amazon have recently conducted stock splits to broaden their investor base.
Strong Start To 2024
Microsoft's first-quarter earnings report for 2024 indicated a strong performance. Revenue exceeded analysts' estimates by $1.95 billion, reaching $56.5 billion, up 25% year-over-year. Earnings per share (EPS) also beat expectations, coming in at nearly $3 ($2.99), up from $2.69 quarter-over-quarter and $2.35 a year ago. The growth was primarily driven by key segments like Azure, Dynamics 365, and Microsoft Cloud services. Additionally, Microsoft 365 consumers increased by 14% from 67 million to 76.7 million, showing healthy growth in user numbers.
In conclusion, Microsoft stands out as a globally recognized company that consistently finds innovative ways to grow its business. Despite concerns about its valuation, it offers double-digit upside potential. Its commitment to share repurchases and a history of stock splits make it an attractive prospect for investors. Moreover, its resilience, conservative payout ratio, and resistance to economic downturns make Microsoft a compelling choice for those seeking long-term growth and income.

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