Dividend Increase: Microsoft (MSFT)

Microsoft announced an annual increase to their dividend of 8.33% after the market close.  The new quarterly amount is $0.39 per share from the prior $0.36.  The increase is on the mark with my expectations.  This marks 7 straight years of dividend increases since the company started paying dividends back in 2003 and increases for 10 of the 14 years they’ve been paying.  While their dividend history is short (as well as the streak), don’t be fooled by the brief history, as tech has been one of the hottest areas for dividend growth.  Along with MSFT, check out companies like CSCO, NVDA, QCOM, and even AAPL has jumped on board.  Something all of these companies have in common- healthy ass balance sheets, low debt and tons of cash.

Other big news out of Redmond, a $40Billion share repurchase has been announced as well.  This represents just under 10% of the companies market cap.

Are MSFT’s best days behind it?  We won’t see growth like back in the 80’s and 90’s, but don’t write them off yet.  Sure PC sales are declining, but licensing is holding it’s own, and the cloud represents it’s greatest opportunity for growth (and large companies are signing up).  The Balmer era is long gone, and Satya has a good vision for directing this $440Billion behemoth.  Satya Nadella has made Bill Gates and Steve Balmer a ton of money since taking over.

Let’s look at some dividend history:

Now you can see why the short dividend streak doesn’t really bother me.  MSFT is generous when it does increase the dividend.  From 2004-2016, the quarterly dividend has grown at 13.32% per year on average (and that average includes a few goose eggs as well).  Meanwhile, your annual income from the dividend has grown at an impressive 20.37% per year.  What this all translates into, your dividend income from this one snoozer, often counted out by analyst, value play of tech company has grown a massive 818.75% from 2004-2016.  Feel free to double check my math.  Steve and Bill just can’t even come close to spending their money fast enough with that kind of dividend income history.

I don’t expect that kind of massive growth going forward.  I mean, you’re talking about a company going from no dividend to a dividend darling in a short period of time.  I do however think dividend growth in the neighborhood of 8-10% is conservatively doable.

Let’s look at some figures to try to justify that dividend growth:

Market Cap: $442 Billion

Profit Margin: 19.69%

Total Cash: $113 Billion (a quarter of their market cap is sitting in cash!)

Total Debt: $54 Billion (MSFT took on debt to take advantage of low rates)

PE Ratio: 27

Levered Free Cash Flow: $16Billion

Payout Ratio: 66.19%

Beta: 1.36

Current Yield: 2.74%

I like the profit margin, cash in the piggy bank, yield, yield and the payout ratio isn’t too bad.  I hate the debt, but is was issued at ridiculously low AAA rates.  The PE is a little high for my taste, but we live in a high PE world currently.  That cash allows for MSFT to make smart acquisitions, however they have a history of some flubs in the takeovers.  If they don’t blow the cash on bad acquisitions, they have plenty of room to return cash to shareholders despite the 66% payout ratio.  Let’s face it too, with that much cash on hand, they can make quite a few bad acquisitions before it really matters.

MSFT vs S&P500

msft-vs-sp500Going back the last decade, Microsoft has largely just tracked the S&P500, with the exception of about the last 2 years.  I like to think this sudden outperformance of the S&P500 is do to the direction that Satya is taking the company.

In short, I have not written off MSFT like many have.  I think the income play potential is awesome.  The death of PC is overplayed by analyst, and honestly MSFT is focusing efforts on its real growth prospects with cloud and enterprise business.

I expect more of the same for 2017 of a $0.03 increase on the low end, and $0.04 on the high end.  This would represent a dividend increase of between 7.69-10.25%.

 

 

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