This 'capital efficient' software maker loves to reward shareholders
April 23, 2019

From Stansberry Research:

It's the most important and safest idea for investing in stocks...

It involves some of the most financially stable companies in the world...

These elite businesses generate tons of cash every year. They regularly return more capital to their shareholders than they spend on capital investments. And as you'll see today, that combination allows them to produce extraordinary returns over the long term.

We call these companies "capital efficient."

Computer software is an inherently capital-efficient industry...

Once the computer code is written, it doesn't cost much for a company to copy and distribute it to another person – or millions of people. It doesn't have to build more factories, acquire loads of raw materials, or hire more workers to grow its operations.

As the world's largest software maker, Microsoft (Nasdaq: MSFT) dominates the field...

Microsoft's rise began when IBM (IBM) asked it to create an operating system for its computers in 1980. Today, Microsoft needs little introduction to most investors...

Microsoft sells software programs, games, applications, devices, and platforms to billions of people in more than 190 countries. Among the most widely used are its Windows operating system and its Office suite of productivity software. The Office software includes Excel (spreadsheets), PowerPoint (presentations), Word (word processing), and Outlook (e-mail).

But despite its long-term success, Microsoft hasn't always been a great investment. Under former CEO Steve Ballmer from 2000 to 2014, it missed a lot of major tech innovations...

Microsoft missed the shift to mobile computing. It was late to adapt its software to the Internet. And when Apple's (AAPL) iPhone debuted in 2007, Ballmer proclaimed that there was "no chance that the iPhone is going to get any significant market share."

Later, he said apps would never take off because no one used them. (Apple sold $47 billion in apps last year, and some analysts expect that to double by 2023.) When search-engine firm Alphabet (GOOGL) – the parent company of Google – went public in 2004, he called it "a house of cards." He made similar claims in 2014 about online retailer Amazon (AMZN).

Under Ballmer's watch, Microsoft shares fell by 35%. (The benchmark S&P 500 Index was up more than 20% over the same period.) Fortunately, that's all well in the past now...

Since early 2014, Satya Nadella has been Microsoft's CEO. He's everything Ballmer wasn't...

Nadella is an engineer who has been at Microsoft for almost three decades. He collects facts and makes measured decisions. He has revitalized the company's culture. And under Nadella's leadership, the company is investing heavily in future technologies...

Last year, Microsoft spent $16 billion on research and development. The company is now cranking out cutting-edge products and reversing archaic policies that used to hold it back.

For example, Microsoft moved its Office suite to the "cloud," creating Office 365...

This shift allowed users to access the Office software from any web browser in the world. And it has been popular... Today, more than 155 million people use Office 365 every month.

Microsoft also shifted its focus to providing cloud-computing services under the name "Azure." This service lets companies or websites quickly and easily use Microsoft's servers, rather than build their own. It's a key growth engine for Microsoft moving forward...

In the second quarter of the company's 2019 fiscal year, which ended in December, revenue from the Azure business grew 76% over the same period in the previous year. More important, by putting their money to work with a well-proven, capital-efficient powerhouse like Microsoft, investors get a much safer way to invest in the volatile cloud-software space.

Over the past 12 months, Microsoft generated more than $118 billion in total sales. More than a quarter of that – nearly $32 billion – filtered down into free cash flow (FCF). Most companies are lucky if their FCF is more than 10% of their total revenue.

FCF is the one metric we value most...

It's simply a measure of a company's "cash profits" minus "capital expenditures" – or "capex." (Cash profits are the cash a company generates from its operations. Capex is the cash needed to maintain equipment and invest in new buildings, equipment, and software.)

You can't fake cash. It's the one number on the financial statement that doesn't lie.

With so much FCF, Microsoft loves to reward its shareholders...

Last year, it returned almost $30 billion back to shareholders through dividends and share buybacks. So for every $1 Microsoft made in sales, it sent nearly $0.24 to shareholders.

Those are outstanding numbers.

Microsoft has always been a remarkably profitable company. But under Ballmer's direction, its stock lagged the broader market for years. Now, its business generates massive streams of income and the company has great leadership that has reaccelerated growth.

And best of all, shareholders are being rewarded...

Since bottoming on Christmas Eve, Microsoft's stock has soared more than 30%. And with shares trading at nearly $124 today, Microsoft continues to surge to new all-time highs.

Sometimes investing is simple.

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