If I Could Only Own One Stock Forever, This Would Be It

Microsoft (MSFT) makes products that corporations need and consumers want.

Although it is considered “old tech” by some, it is an innovative company that is still growing strongly. It has a very wide moat, and it boasts a pristine balance sheet.

Bottom line: Microsoft is one of the most valuable businesses in existence — indeed, one of only two with a $2 trillion market cap — for a simple reason: It is among the very best companies on the face of the earth.

The One & Only

This site’s co-founder, Greg Patrick, gave me a pretty audacious assignment, asking me to write an article that answers this question:

Which stock would you choose if you could own only one?

As a strong believer in a diversified portfolio and as an investor who has lived through several recessions, I get the willies just thinking about having a one-stock portfolio.

So rest assured … nobody here is suggesting that any investor have Microsoft (or any other single company) as one’s only holding.

I took this as an exercise in judgment and analysis … and yes, I accepted it as a challenge. If I was going to pick only one stock, and I had to own it forever — or at least for years and years — it had better be a darn good one.

Microsoft certainly is that, and more.

Then … And Now

Not all that long ago, Microsoft was primarily a software company, selling floppy disks loaded with Windows and Office.

It was a highly profitable business, turning college dropouts Bill Gates and Paul Allen into two of the world’s richest people.

As the computing universe changed, however, MSFT was slow to adapt. While competitors were embracing “the internet of things” and going mobile, Microsoft was still hawking Windows and Office disks for PCs.

Steve Ballmer, who succeeded Gates as CEO on Jan. 13, 2000, was good at making himself tons of money.

But his company’s attempts at innovation — from Zune to Vista to Kin to “Bob” to Cortana to Groove Music to Bing — gained little or no traction.

Microsoft’s once-sterling reputation was taking a beating, and its stock price languished for years.

When Satya Nadella replaced Ballmer as CEO on Feb. 4, 2014, he was faced with the herculean task of turning an old tech company into a relevant, vital operation. As it turns out, he has succeeded spectacularly.

Satya Nadella (Photo from Business Insider)

As executive vice president of the company’s Cloud and Enterprise group before becoming CEO, Nadella oversaw the beginnings of Microsoft’s transformation to the cloud infrastructure and services business.

He has used that experience to turn Microsoft into a “reawakened tech” juggernaut … and Mr. Market obviously has approved of the job Nadella and his people have done.

The following slide from the company’s 2021 fourth-quarter earnings presentation shows just how much its operations have grown under Nadella. The red numbers that I inserted represent the corresponding data from the Q4 2018 report. So, for example, Intelligent Cloud produced $17.4 billion in revenue in Q4 2021 (vs. $9.6 billion just three years earlier), with year-over-year growth of 30% (vs. 23% in 2018).

The lone green number shows that in only one of these categories (YOY growth of the More Personal Computing segment) did the 2021 result fail to exceed that of 2018.

The last two rows — Net income and Diluted earnings per share — were especially eye-opening to me, with the Q4 2021 numbers about double those of just three years earlier, and the growth almost five times greater. Wow!

Microsoft’s main set of cloud services, called Azure, has become indispensable for hundreds of companies, and it is closing the gap on market-leading Amazon Web Services.

Nadella and his team also changed the way most companies and individuals receive Office products.

Rather than buying disks they would keep until an update would become available — or even longer — customers now must purchase and renew annual subscriptions.

As Morningstar Investment Research Center said:

Microsoft’s Office tools remain the most heavily used productivity suite in the world; the firm commands a monopolistic position in on-premises deployments and has quickly amassed leading share in cloud-based productivity software deployments. Office’s scale is unmatched, with more than 1 billion people using the software around the world. … While Google made its mark with web-based office applications, Office 365’s superior feature set has yielded much swifter and broader adoption, evidenced by Office 365’s rapid ascension to the most heavily used cloud-based application suite today, surpassing Google’s once-leading position despite Google’s multiyear head start as a cloud-based suite.

The Windows 10 operating system has been a major hit with customers … and the all-new Windows 11 is on the way. The Microsoft Teams video conferencing app became very popular during the pandemic. The X-Box gaming system, Surface tablet and LinkedIn professional network also have contributed to Microsoft’s renewed success story.

The following earnings graphic illustrates that despite a few rough patches, MSFT has had only three down years in the last two decades (red-circled areas).

fastgraphs.com

Meanwhile, the blue-circled area shows the double-digit annual EPS growth expected over the next few years. Given that it is the only stock I’m going to own (in this hypothetical exercise, anyway), that’s important.

And of course, quality matters most of all.

Value Line awards MSFT its highest scores for financial strength (A++) and safety (1) … Morningstar gives MSFT its top designations for economic moat (Wide) and capital allocation (Exemplary) … and along with Johnson & Johnson (JNJ), Microsoft is one of only two companies in the world to receive the ultimate AAA credit rating from Standard & Poor’s.

Income Production, Too

My primary strategy is Dividend Growth Investing, so I like that Microsoft’s dividend has increased substantially over the last decade-plus.

SimplySafeDividends.com

With its ability to generate free cash flow, its extremely low debt and its low payout ratios, Microsoft gets a Dividend Safety score of 99 (out of 100) from Simply Safe Dividends.

SimplySafeDividends.com

When I first started buying Microsoft stock, it had a 3% dividend yield. The stock’s price surge over the last few years has dropped that yield well below 1% … but that’s a very pleasant “problem” to have.

You’ll never hear me say, “Darn it … Microsoft is making me too much money!”

Wrapping Things Up

Although Microsoft isn’t really the only stock I own, it has grown to become the largest position in my portfolio by a pretty wide margin. And as long as its business model remains relevant and fundamentally sound, I see no reason I’d ever sell it.

MSFT also has been a star in all three real-money, public portfolios I manage. With a total return of about 650% since December 2014, Microsoft has been the best performer in the Dividend Growth 50 (see graphic below); it has the second-highest total return in the Income Builder Portfolio, which I launched in 2018; and MSFT is the No. 4 gainer in the Grand-Twins College Fund that I started in June 2020.

Dividend Growth 50 — Top Holdings — August 2021

Before settling on Microsoft, other stocks I considered for this exercise included NextEra Energy (NEE), Visa (V), McDonald’s (MCD), Apple (AAPL), Alphabet (GOOGL) and Johnson & Johnson.

My portfolio holds all of those companies, and it would be hard to imagine long-term investors going wrong with any of them.

Nevertheless, I kept coming back to Microsoft as the one I’d own if I could own only one. It’s a well-run, wide-moat, dividend-growing, forward-thinking, money-making machine.

— Mike Nadel

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Source: Dividends and Income