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Microsoft Corporation (MSFT): The Long-Term Approach

 June 18, 2013 10:43 AM

by Ingrid Hendershot, editor Hendershot Investment

Founded 38 years ago, Microsoft (MSFT) helped launch the first great wave of an information technology transformation; it remains the world's largest software developer with sales topping $73 billion in fiscal 2012.

Throughout its history, Microsoft has achieved success by taking a long-term approach to technology investments. In fiscal 2012, Microsoft invested $9.8 billion or 13% of revenues on research and development with much of that devoted to cloud technologies.

Cloud computing links the computing devices people have at hand to the processing and storage capacity of massive datacenters. Microsoft's solutions will bring the benefits of the cloud to the billion people who use computing today and the billions more who will gain access to digital technology for the first time in the years ahead.

[Related -Microsoft Corporation (MSFT) Earnings Preview: What To Watch In Q2 Results?]

Microsoft believes the impact of cloud computing will be as big, if not bigger, than the previous waves of technology change.

Microsoft's research is paying off as people increasingly choose Microsoft cloud services including Office 365, Windows Azure, Xbox LIVE and Skype. Microsoft recently unveiled Xbox One, an all-in-one gaming and entertainment system..

Microsoft reported excellent fiscal third quarter results with revenue increasing 18% to a record $20.5 billion, generating a 19% increase in net income to $6.1 billion. Growth across all business segments led to this high double-digit growth.

[Related -Microsoft Corporation (MSFT): Good Buy or Good-Bye?]

Microsoft generates exceptional cash flows with the company's trailing 12-month free cash flow topping $27.5 billion, representing a nearly 10% free cash flow yield based on the company's current market capitalization.

Year-to-date, Microsoft has returned $9.8 billion to shareholders through stock buybacks of $4.3 billion and dividends of $5.5 billion, an 18% increase over last year. The dividend currently yields a solid 2.6%.

Microsoft's strong balance sheet boasts more than $74 billion in cash, which provides the company with the financial flexibility to continue to handsomely reward shareholders while investing in future growth.

Microsoft is a high-quality market leader generating exceptional cash flows with substantial cash returned to investors through growing dividends and share buybacks. Buy.

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