Tech giant Microsoft Corporation (MSFT - Get Rating) continues to invest in strategic growth initiatives. Last month, a collaboration with chip juggernaut NVIDIA Corporation (NVDA) was announced, aimed at developing a ‘massive’ computer that can handle artificial intelligence computing work in the cloud.

MSFT’s solid financials help the company consistently reward shareholders through dividends. The company declared a quarterly dividend of $0.68 per share on November 29, payable to shareholders on March 9, 2023. Its annual dividend of $2.72 yields 1.13% at the current price level.

The company’s dividend payouts have increased at a 10.4% CAGR over the past three years and a 9.8% CAGR over the past five years. MSFT has a record of 18 years of consecutive dividend growth.

The company surpassed consensus EPS estimates in three of the trailing four quarters. Moreover, analysts expect MSFT’s EPS to grow 13% per annum over the next five years.

Although the stock has declined 6.4% over the past six months, it has gained marginally over the past month and the past five days to close its last trading session at $241.01. It is trading higher than its 50-day moving average of $240.80.

Here are the factors that could influence MSFT’s performance in the near term:

Solid Financials

For the fiscal first quarter ended September 30, MSFT’s total revenue increased 10.6% year-over-year to $50.12 billion. Gross margin rose 9.5% from the prior-year quarter to $34.67 billion. Operating income improved 6.3% year-over-year to $21.52 billion. Net income and EPS came in at $17.56 billion and $2.35, respectively.

Robust Profitability

MSFT’s trailing-12-month EBIT margin and net income margin of 41.69% and 34.37% are 529.6% and 958.8% higher than the industry averages of 6.62% and 3.25%, respectively.

The stock’s trailing-12-month ROCE, ROTC, and ROTA of 42.88%, 21.97%, and 19.40% are 757.1%, 577.9%, and 1,176.5% higher than their respective industry averages of 5%, 3.24%, and 1.52%.

Strong Growth History

MSFT’s revenue grew at a 16.1% CAGR over the past three years and a 15.4% CAGR over the past five years. Its EBIT and net income grew at 22.8% and 19.3% CAGRs over the past three years. Its EPS increased at a 20.6% CAGR over the same period.

Favorable Wall Street Sentiment

In the last three months, 27 Wall Street analysts rated MSFT. Of them, 25 rated the stock a Buy, while two gave it a Hold rating. The 12-month median price target of $291.34 indicates a 20.9% potential upside. The price targets range from a low of $234 to a high of $371.

POWR Ratings Reflect Promising Prospects

MSFT’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. MSFT has a B grade for Sentiment and Quality, consistent with favorable analyst sentiment and higher-than-industry profitability. It has a Stability grade of B, in sync with its five-year beta of 0.93.

In the 53-stock Software – Business industry, it is ranked #9.

Click here to see the additional POWR Ratings for MSFT (Growth, Value, and Momentum).

View all the top stocks in the Software – Business industry here.

Bottom Line

MSFT has been investors’ darling for a long time, and the company is taking up strategic growth initiatives. Also, MSFT’s steady dividend growth record looks promising. As Wall Street analysts expect a more than 20% upside in its stock, MSFT might be a solid buy now.

How Does Microsoft Corporation (MSFT) Stack up Against Its Peers?

While MSFT has an overall POWR Rating of B, one might consider looking at its industry peers, Yext, Inc. (YEXT - Get Rating), which has an overall A (Strong Buy) rating.

MSFT shares were trading at $237.67 per share on Friday morning, down $3.34 (-1.39%). Year-to-date, MSFT has declined -28.67%, versus a -18.68% rise in the benchmark S&P 500 index during the same period.

About the Author: Anushka Dutta

Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research. More...

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