Should You Buy the Dow — Microsoft

Today, were looking at Dow Jones Industrial Average component Microsoft
(NASDAQ: MSFT ). I personally sold out of the stock more than 10 years ago, the
day after it was declared a monopoly by the Department of Justice. I recently
took a peek at Microsofts offerings, and while they have expanded exponentially
since then, MSFT really remains a software company to the core. And you've
heard of just about everything it produces, mostly because when you buy a
Microsoft product, you know it's a Microsoft product and not just because of
the inconvenience caused by registering it. The key driving factors regarding
Microsoft are the economy and competition. The truth is, however, that because
Microsoft's operating system is so ubiquitous, the economy didn't make an
enormous dent in its net income. From July 1, 2008, to July 1, 2009, MSFTs net
income fell from $17.6 billion to $14.56 billion, then leaped back up to $18.76
billion and never looked back. Microsoft does see much-hyped competition from
Apple (NASDAQ: AAPL ), but in the grand scheme of things, its making do just
fine. Microsofts other software applications are in the same situation. The
company essentially still is a giant castle with a large moat around it.
Microsoft's financials are practically perfect. The company just reported Q3
revenue up 7% over last year, net income of $5.74 billion (up 7%), diluted
earnings of 68 cents per share (up 10%) and growth among virtually all of its
divisions. The company carries $57 billion in cash and $11.9 billion in
low-interest debt. Trailing 12-month cash flow was (I'm laughing as I write
this) $25.1 billion! That's five times the amount of free cash flow necessary
to pay its 3% dividend. Conclusion Stock analysts looking out five years on
Microsoft see annualized earnings growth at 10%. MFST's $5 per share in net
cash gives it an effective stock price of $22, and on FY 2011 earnings of $2.85,
the stock presently trades at a P/E of 7.7. I think Microsoft is deserving of an
enormous premium. It is as close as you are likely to get to a safe stock that
still has growth potential and it pays a dividend. I would put an 11 P/E on it,
which on projected 2015 earnings of $4.51 per share (factoring in the 3%
compounded dividend yield reinvested), we get a price target of $50. That's a
great return from here. I believe MSFT is a buy for regular accounts. I believe
MSFT is a buy for retirement accounts. As of this writing, Lawrence Meyers did
not own a position in any of the aforementioned stocks. Check out Meyers take on
other Dow Jones stocks here .