Why this S&P 500 stock looks tasty after unexpected good news

Jon Smith flags up news regarding buybacks, new product features and dividends for an S&P 500 tech business that makes the outlook pretty rosy.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

The flag of the United States of America flying in front of the Capitol building

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Over the past few days, the Microsoft (NASDAQ:MSFT) share price has been ticking higher. The S&P 500 giant’s benefitted from several pieces of good news, which I think sets up the company for a strong outlook through to the end of the year and beyond. Here’s what’s going on.

Buyback news

On Monday (16 September), the firm announced a new share buyback programme of up to $60bn. This is equal to the largest it’s ever done. There’s no official end date by which it has to complete the repurchase of stock, but it was certainly an unexpected announcement.

Usually, businesses buyback stock when the price is low, or when the management team feels like it’s good value. The share price is up 31% over the past year. But at $431 it’s still some way off the $466 level we saw back in the summer.

To me, this indicates the firm believes the stock isn’t overvalued, hence why they’re happy to repurchase some of it using free cash. After all, if they were concerned about the stock being in a bubble then it would make sense to wait for it to pop and then repurchase at a lower price.

Some will argue that the share repurchasing shows management doesn’t have any better use for the money. It’s true that this cash could be used to invest in new projects within the company to help further growth. Yet Microsoft’s a cash cow. In the latest quarter through to the end of June, it recorded net income of $22bn alone! So it has plenty of funds to invest in new ideas alongside this buyback scheme.

New features

My attention was also drawn to the news that Microsoft is shortly releasing new artificial intelligence (AI) features for use inside Office apps. This includes Excel, Word and Outlook apps, making it easier to use and offering assisted help to make tasks more efficient.

This will really start to differentiate the products away from competitors. I think over the next year this could be an avenue of revenue growth for the company. In turn, this should help to positively impact the share price.

Dividend increases

A final announcement was that the dividend payment’s going to be raised by 10%, from $0.75 per share to $0.83. The current dividend yield‘s 0.75%, so certainly nothing to write home about. However, the fact that this growth stock’s now pivoting to paying out income and increasing the payment per share is positive for the future for dividend investors.

Despite all this good news, I still need to be aware of potential risks. Microsoft has tough competition in the cloud space from Amazon and Alphabet. This could eat away market share if it focuses too much on other ventures.

On balance, I think the latest news is very positive for the stock going forward. I’m seriously thinking about adding it to my portfolio shortly.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended Alphabet, Amazon, and Microsoft. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on US Stock

A pastel colored growing graph with rising rocket.
Investing Articles

2 incredible growth stocks that just soared 25%+!

This writer takes a look at a pair of top growth stocks that have rocketed 25% or more since the…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

35% of FTSE 100 firms use this award-winning US company to keep the wheels turning

This rapidly expanding software company helps one-third of FTSE 100 companies operate. I took a peak at its latest results…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
US Stock

Is it too late to buy growth stock Shopify after its 25% pop?

Up more than 40% this year, Shopify is on fire at the moment. Here, Edward Sheldon explains how he’d play…

Read more »

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

A Bitcoin investment that can be held inside a Stocks and Shares ISA or SIPP

UK investors can’t buy Bitcoin ETFs for their investment accounts or SIPPs due to FCA regulation. This stock could be…

Read more »

Bronze bull and bear figurines
Investing Articles

US stock market: the winners and losers one week after the election

Last week's US election spurred big moves in the US stock market, with some global indexes making record highs. Here's…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
US Stock

Should I buy Palantir stock for my ISA after a 200% gain?

Edward Sheldon has cash to deploy within his ISA. Should he buy Palantir shares for more exposure to the artificial…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

Here’s my top pick from the S&P 500

When it comes to the S&P 500, Stephen Wright thinks investors don’t have to look far to find an opportunity…

Read more »

Fans of Warren Buffett taking his photo
Investing Articles

Here’s why Warren Buffett is selling shares (and why I’m not)

Warren Buffett cited tax considerations as his reason for selling shares in Apple. But this isn’t something most UK investors…

Read more »