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Microsoft Is a Buy Before Earnings Release

Stocks in this article: MSFT ORCL

Investors are receiving 92 cents in dividends for a yield of 3.2%. The forward payout ratio is less than 40%. Once you combine the relatively low payout ratio with the historical rises in dividend payments, you are looking at a stock that you can take a chance with. If reported earnings fall short of expectations, the oversized dividend provides cover.

Microsoft has almost no short-seller interest, and the few shares that are shorted lack a meaningful influence at only 1.4% of the average trading float.

The last time Microsoft disappointed investors was two quarters ago. After releasing the results on Oct. 18, 2012, shares slid about 5% before recovering. About a week later, shares fell again, but have since recovered.

Oracle's (ORCL) results give us a look at what Mircosoft faces. Oracle didn't inspire shareholders about two weeks ago with its lukewarm results. Oracle's investors focused on the shift into cloud computing and concern over lower-cost solutions. For example, NoSQL may be gaining acceptance and could impact Microsoft's enterprise-level SQL database products.

Oracle doesn't have nearly the cloud presence that Microsoft has built over the years. Regardless, if Microsoft isn't able to monetize cloud computing as well as its traditional software products, margins and earnings may come under pressure.

Unlike Oracle, Microsoft has many irons in the fire and enjoys greater diversification and profit streams. For these reasons, I am bullish on Microsoft. I anticipate earnings to top 75 cents per share.

Look for option premium increases, although they should remain relatively low compared to other technology companies into the earnings release. If you're considering adding Microsoft, you may want to look at the April $30 put options that expire on Friday. Microsoft's April 12 closing price was $28.79, and the $30 puts can be sold for about $1.33.

You can shave about a dime off the cost of your shares, and more importantly, reduce your overall risk by about 5%. Using options only works in this case if you have low-cost commissions. Otherwise, you're probably better off sticking with the actual stock.

MSFT Revenue Quarterly Chart MSFT Revenue Quarterly data by YCharts

Disclosure: The writer holds no securities mentioned in this article.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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