The Debt-Averse Portfolio: Microsoft

Microsoft (MSFT) was debt free until financing some acquisitions beginning in about 2008. Their long term debt level is currently sitting at about $11 billion. That number gets real small when you consider that Microsoft is sitting on $50.44 billion in cash. Microsoft is a cash machine with revenue of $70 billion last year at a net margin of 33%. The debt/equity ratio is at 0.21. That is debt averse in the large cap world.

Microsoft has grown up in the last few years. A dividend was established in 2006 and a special one-time dividend was made to shareholders as well. One of my favorite things about Microsoft is that they focus on software. This makes development and deployment of new products fairly easy for them if compared to the development of hardware. I know these guys are into all kinds of stuff, but the software items are the center piece. I think the market is already blessing Windows 8 by giving the stock price a new intermediate high before the seasonality drop got to everybody in May.

See price action in the last few months:

Click to enlarge.

Over the last 10 years Microsoft has been building value. When the air came out of the tech bubble in 2000 the good companies, like Microsoft , Intel (INTC) and Cisco (CSCO), just kept on working. Microsoft stayed debt free and increased revenue and profits while trading side ways in price from 2002 until now. I know these charts are tough to keep digging through, but please look at the rock star Financial breakdown for MSFT for the last 10 years:

While the share price has basically gone no where Microsoft has doubled total revenue and managed to push up EPS by 500%. In 2008 they implemented a $40 billion share buyback program that will continue through 2013. The dividend has doubled in 6 years (almost). At this point you should be asking what is holding back the price of this stock?

I think the great fascination with social media is effecting the investing psychology when it comes to fundamental business health in the tech sector. I also believe that the amazing work that Apple (AAPL) has done has put a question mark on the future of all things computer related. Google (GOOG) has had a smaller but like effect on the ideas for the future of this market. Innovation is key to value in the tech market, and that is the one area that Microsoft worries me.

I had a small group of limit orders on Microsoft spread around my clients' portfolios at $29. I honestly wondered if I was going to get them at $29 and here we are below that level. As of 6/4/2010 Microsoft's PE ratio was 10.4! I always feel like there is downside in these markets but I'm not afraid of a good value and rising dividends. I'm even more interested if I can get those things and stay debt averse.

Disclosure: I am long MSFT.