By Michael Vodicka
Big tech is having another monster year. The big four technology leaders, also known as FANG — Facebook, Amazon, Netflix, and Google (Alphabet) — have returned an average of 29% in 2017. Take a look at the chart below.
This basket of tech high flyers has been great for growth investors, crushing the S&P 500’s 9% return in 2017.
However, for income investors, these outsized gains have been painful to watch. Most of the FANG stocks don’t pay a dividend. And watching this group of stocks deliver a 29% gain in less than six months can make a normally impressive 5% dividend yield seem insignificant.
But don’t worry, I have the perfect solution for income investors looking for a piece of tech growth — a well-known global leader that I consider to be the best growth and income stock in the S&P 500.
This global leader is still delivering outsized sales and earnings growth. It offers one of the best dividend yields in the technology sector and one of the fastest growing dividends in the S&P 500. And even better, compared to FANG stocks it looks undervalued.
Microsoft Corporation (NASDAQ:MSFT) is one of the greatest growth stocks in the history of the Nasdaq. Since going public in 1986, shares are up more than 72,120%. That means $1,000 invested back then would now be worth $7.2 million today. Take a look at the impressive run below.
Now, I don’t expect Microsoft to repeat that same amazing performance in the next 31 years. But today, MSFT has grown into a stock with the best combination of growth potential and income in the S&P 500.
Microsoft Is On Pace For A Big 2017
Microsoft was a bit slow to adjust to mobile and cloud computing. Its success was tied to the desktop computer, and that turned out to be bad for sales growth when the iPhone, iPad, and cloud services exploded onto the scene.
However, Microsoft appointed new CEO Satya Nadella in early 2014. Since then the tech giant’s cloud and mobile divisions have been rapidly gaining market share. In third-quarter results from April, Microsoft’s Intelligent Cloud business saw revenue increase to $6.8 billion, an 11% increase from the same period last year.
And the growth doesn’t stop there. Its Enterprise Cloud revenue under the name Azure grew 93% from last year. Microsoft’s Commercial Cloud business now has an annual run rate of $15.2 billion that is expected to grow to $20 billion by 2018. That puts the company at number two in market share behind current leader Amazon.
But that may change sooner than later. Morgan Stanley recently released a study that found CIOs are more likely to use Microsoft’s cloud computing services than Amazon in the next three years.
The success of its cloud services is the biggest revenue driver, making Microsoft a great growth stock for the years to come. Revenue is on pace to grow 13% in 2017 and projected to grow another 8% in 2018. Earnings are on pace to grow 9% in 2017 and projected to grow another 10% in 2018.
This outsized sales and earnings growth will fuel one of the fastest growing dividends in the S&P 500.
Microsoft Has Grown Its Dividend 97% In The Last Five Years
Microsoft made its first ever dividend payment back in February of 2007, just over ten years ago. At the time, it was big news. It was somewhat unusual for big technology companies to initiate a dividend.
The first MSFT dividend came in at just $0.10. Since then, its payment has grown to $0.40 per share, close to a 300% increase in 10 years. In the last five years, Microsoft’s dividend has grown 97%. Take a look below.
Microsoft currently has more than $100 billion in cash on its balance sheet. That’s a lot more capital than Microsoft could invest in growth even if it wanted to.
My prediction is that Microsoft will use its massive and growing cash position to reward investors with big-time dividend growth — potentially doubling its dividend once again within the next five years.
Despite this impressive sales and dividend growth, Microsoft looks cheap compared to other leading technology companies. Its forward P/E ratio of 23 is a steep discount to Amazon’s 151, Netflix’s 148, Facebook’s 31 and Google’s 28.
Risks To Consider
Microsoft is in the early stages of a revenue recovery. The outlook looks great, but that also means expectations have risen. Microsoft needs to deliver strong sales and earnings growth or risk a short-term pullback.
Action To Take
Microsoft is one of the best growth and income stocks in the S&P 500. This is a great option for income investors looking for an alternative to the high-growth FANG stocks.
Michael Vodicka does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.