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Microsoft (MSFT) Raised The Dividend Again

Microsoft Raised the Dividend

Microsoft Corporation (MSFT) raised the dividend yet again. The company continues to reward shareholders with solid dividend growth and robust share buybacks. Microsoft Corporation (MSFT) continues to reward shareholders and recently raised the quarterly dividend by 11% to $0.51 per share from $0.46 per share. The dividend increase is the 15th consecutive increase since 2004 making the company a Dividend Contender. In my opinion, Microsoft will eventually become a Dividend Aristocrat barring some unforeseen change in trajectory. Many software and hardware stocks do not pay a dividend or pay only a small one. Microsoft is a notable exception. The company is seemingly dedicated to the dividend and used $13,811 million in cash flow last year to pay the dividend. Few companies can match that dollar value at the moment with the possible exception of Apple (AAPL).

Microsoft
Microsoft Raised The Dividend

If you are interested in investing in stocks that pay dividends I recommend signing up for the Sure Dividend Newsletter*. It is a reasonably priced and one of the top dividend newsletters available. If you want to educate yourself more about dividend investing, then I suggest taking a course. The Simply Investing Course* is a good value and fairly comprehensive.

Overview of Microsoft

Microsoft is arguably one of the great success stories in the software space. The company was founded in 1975 by Bill Gates. Today, Microsoft has one of the highest market capitalizations of publicly traded companies in the U.S. Microsoft Corporation develops, licenses, and supports software, services, devices, and solutions worldwide. The company operates in three business segments: Productivity and Business, Intelligent Cloud, and More Personal Computing. Major brands include Office 365, Xbox, Outlook, Skype, Sharepoint, Exchange, SQL, Visual Studio, Surface, Bing, LinkedIn, and others.

The company has been very acquisitive over the past few years under the current CEO, Satya Nadella, as he moves Microsoft more strongly into the cloud. Major acquisitions include Xamarin, LinkedIn, and GitHub. In 2019, total revenue was over $125 billion.

Microsoft Dividend Safety

Although Microsoft raised the dividend, the forward yield is 1.47%, which is not much to write home about. But still, the dividend is extremely safe. The current payout ratio is 38.8% based on a forward dividend of $2.04 per share and consensus 2019 earnings per share of $5.26 . This is a very conservative value and well below my threshold of 65%. Interestingly, Microsoft is currently generating solid top and bottom line growth. So, I do not see the payout ratio climbing much in the near future despite double-digit increases on average for the trailing 5-years and 10-years.

From a free cash flow or ‘FCF’ perspective, the dividend coverage is also solid. Microsoft generated over $38 billion in free cash flow in fiscal year 2019. The dividend required $13.81 billion in 2019 giving a dividend-to-FCF ratio of 36%. This is well below my threshold of 70%. I used TIKR* for the data in this analysis.

In context of debt, the dividend is rock solid. Microsoft is one of only two companies with a AAA-rated balance sheet. The other being Johnson & Johnson (JNJ). Total debt was about $78.37 billion at end of Q4 fiscal year 2019, which sounds like a lot. But Microsoft had over $133 billion in cash, cash equivalents, and short-term investments on hand at end of Q4 FY2019 more than offsetting the total debt. The debt-to-equity ratio is 0.77 well-below my threshold of 2.0. In addition, interest coverage is over 17X meaning that the company can meet its obligations. In my opinion, debt is not a risk to the dividend at the moment. Again, I used TIKR* for the data in this analysis.

Microsoft Stock Buybacks

Microsoft also announced a $40 billion share repurchase, a fairly large amount. But still, this is only about 4% of Microsoft’s over $1 trillion market capitalization. However, the stock is trading near its all-time high. So, spending $40 billion to buy back stock at this time might not make sense.

Microsoft Trailing Returns

With that said, Microsoft is clearly a stock that I like to own. The stock has generated excellent trailing 10-year average annual returns of about 21.4% with dividends reinvested and 19.5% without dividends reinvested. Both of these metrics trounce the S&P 500’s trailing 10-year average annual returns by a wide margin.  Going back even further Microsoft has consistently returned cash to shareholders and generated solid total returns.

Source: dividendchannel.com

Microsoft’s Competitive Advantage and Risks

The company is a major player in cloud architecture and is firing on all cylinders. This has driven growth across the company. Microsoft’s cloud businesses are growing at a high double-digit rate for the past few years and this looks to extend for the foreseeable future. Microsoft’s Azure product is a viable alternative to Amazon’s AWS and has recently been growing faster. Even Office 365 is generating solid growth after the company switched to a software-as-a-service (SaaS) business model. Additionally, Microsoft has a dominant or major presence in video games with Xbox, servers, operating systems with Windows, SQL Database Management System, developer tools with GitHub and Visual Studio, and even social media with LinkedIn. Microsoft even has a presence in hardware with the Surface tablet but is not the market leader.

One concern is that Surface has no competitive advantage representing one of the few weaknesses in the company’s product line. In addition, Microsoft is facing many strong competition in the information technology space including Apple (AAPL), Alphabet (GOOG), Amazon (AMZN), and Facebook (FB). There are also many other players that compete against Microsoft in certain end markets such as Oracle (ORCL) and International Business Machine (IBM).

Valuation and Final Thoughts on Microsoft Raised the Dividend

Due to these trailing returns one has to pay a premium for Microsoft since the stock is trading at a forward price-to-earnings ratio of 26.3 based on consensus 2019 earnings per share. This premium is unlikely to come down much in the near future due to Microsoft’s current and expected growth rate. From a valuation perspective, I view Microsoft as fairly valued to overvalued at this moment. One should probably wait for a better entry point.

If you are interested in detailed analyses on dividend stocks that discuss risks to revenue, earnings, and dividends sign up for the Sure Dividend Newsletter*.

With that said, the stock’s beta is about 1.10 so in market downturns it should decline greater than the market averages. In fact, in early 2019 the stock dropped as low as ~$94. This was a good entry point and the stock rapidly recovered after that 52-week low. Hence, I will track Microsoft and wait for another downturn before adding to my position. I the mean time I am looking forward to Microsoft raising the dividend again next year.

Disclosure: I am long MSFT and IBM.


Here are my recommendations:

If you are unsure on how to invest in dividend stocks or are just getting started with dividend investing. Take a look at my Review of the Simply Investing Report. I also provide a Review of the Simply Investing Course for those of you that need to learn how to invest. Note that I am an affiliate of Simply Investing.

If you are interested in an excellent resource for DIY dividend growth investors. I suggest reading my Review of The Sure Dividend NewsletterNote that I am an affiliate of Sure Dividend.

If you want to simplify your portfolio management and stop using spreadsheets take a look at my article on Passiv – A Modern Portfolio Management Website ReviewNote that I am an affiliate of Passiv.

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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.

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