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Motley Fool: Huge and still growing

Each of Microsoft's diversified businesses is highly profitable and requires relatively little capital investment to grow.  (Associated Press)
Each of Microsoft's diversified businesses is highly profitable and requires relatively little capital investment to grow. (Associated Press)

Microsoft (Nasdaq: MSFT) – with a market value recently near $2 trillion – is, arguably, one of the safest stocks on the market. It has just about every attractive trait a single stock can possess. Its business is diversified: in this case, across operating systems (Windows), software (Office 365), cloud infrastructure (Azure), social media (LinkedIn) and video gaming (Xbox). Every one of these lines is a growth business, and most generate recurring subscription revenue. Moreover, each of these businesses is highly profitable and requires relatively little capital investment to grow.

In the quarter ending Dec. 31, 2020, Microsoft’s revenue accelerated by 17% year over year, while operating income grew by an even more impressive 29%. It also has a terrific balance sheet, with $132 billion in cash against just $60.5 billion in debt. That leaves plenty of cushion against a big downturn in the market – and if one arrives, Microsoft could buy up its own stock at a discount, or make opportunistic acquisitions.

Then there’s the dividend: Microsoft’s stock recently yielded less than 1%, but that payout has been increased by an annual average of 9% over the past five years, and is likely to keep rising over time. (Teresa Kersten, an employee of Microsoft subsidiary LinkedIn, is a member of The Motley Fool’s board of directors. The Motley Fool owns shares of and has recommended Microsoft.)

Ask the Fool

Q: Can you explain what “points” are, financially speaking? – T.P., Biloxi, Mississippi

A: There are several kinds of points:

• In the mortgage world, points are fees you can choose to pay to your lender for a lower interest rate. A point is 1% of your loan amount – so, for a $200,000 mortgage, a point is $2,000.

• A “basis point,” meanwhile, is one one-hundredth of a percentage point, or 0.01%. People sometimes refer to basis points when talking about interest rates or bond yields.

• Stock market indexes are often measured in points rather than dollars, even though they’re based on stocks that trade in dollars. For example, the Dow Jones Industrial Average or the S&P 500 might go up (or down) hundreds of points in a day.

Q: I read that Netflix once used a “poison pill” strategy – what’s that? – P.B., Greensburg, Pennsylvania

A: In 2012, corporate raider Carl Icahn alarmed Netflix when he bought almost 10% of the company’s stock – suggesting that he might have been preparing to push for a leadership change or even a hostile takeover. So Netflix did what many companies have done to avoid being taken over – it instituted a “shareholder rights plan,” otherwise known as a poison pill. One variety, when triggered, permits the company to sell shareholders newly issued shares, in order to dilute the potential acquirer’s stake.

Poison pill plans are typically triggered whenever some party’s ownership stake in a company crosses a certain threshold. These plans can successfully fend off takeovers. But they have risks of their own: Sometimes a takeover isn’t a bad thing, and diluting shares can hurt existing shareholders.

My dumbest investment

My dumbest investment was buying foreign currency – specifically the Iraqi dinar. I know … stupid. But I also blew $300 on an extravagant dinner once; I would have hated to miss out. In the end, I’m not out much besides my pride. – R.G, online

The Fool responds: We all make financial blunders. With any luck, they won’t be major, and we can learn from them and move on without kicking ourselves too much.

Spending money on great experiences, such as an amazing meal or a trip to another country, is generally worth it, as long as you can afford it. Investing in foreign currency can be tricky, though, and it’s best to read deeply on it first and to really know what you’re doing.

For more than a decade, many Americans, including lots of military personnel, have been persuaded to invest in Iraqi dinars. It has repeatedly been referred to as a scam. The proposition is not unlike that for penny stocks – they’re so cheap that you can buy a lot with relatively few dollars, and they’re so cheap that they’re likely to increase in value. Unfortunately, many investors in the currency have been burned – because Iraq remains a war-torn nation without a thriving economy.

Currency investments can be quite speculative. It’s safer to stick with more reliable investments, such as those in solid dividend-paying stocks, or in bonds issued by trustworthy entities.

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