The Plunge in Microsoft’s Valuation

For the last 16 months, shares of Microsoft ($MSFT) have mostly been locked in a tight trading range between $24 and $28 per share. The stock has crept out of that range only a few times.

What’s amazing is how far Microsoft’s valuation has fallen (see chart below). The stock dipped below $25 per share today. For the last fiscal year, the computer giant earned $2.69 per share, so that’s a trailing P/E Ratio of 9.3.

Analysts on Wall Street expect earnings for the current fiscal year, ending in June 2012, of $2.86 per share. For the year after that, analysts see earnings of $3.13 per share. So the company is still growing, albeit not like it was 15 years ago.

The chart below shows MSFT’s price over the last ten years along with its earnings-per-share and P/E Ratio. Notice how steeply the P/E Ratio has plunged.

Basically, MSFT has shifted from being a growth stock into being a value stock. It must sound odd to anyone who remembers the go-go days of the 1990s to call Microsoft a “value stock,” but look at the facts.

The company just raised its quarterly dividend by 25% to 20 cents per share. At $25 per share, an 80-cent annual dividend comes yields 3.2% which is more than a 30-year Treasury.

Bear in mind that Microsoft is rated Triple-A while U.S. government debt is not.

Posted by on September 26th, 2011 at 12:28 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

Tickers: