HomeMost PopularMicrosoft: Don't Knock The Dividend Yield, Look At Growth And Longevity Instead

Microsoft: Don't Knock The Dividend Yield, Look At Growth And Longevity Instead

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Microsoft Corporation (NASDAQ:MSFT) just announced its annual dividend increase, marking the company’s 14th consecutive year of dividend growth. While some may question the modest dividend yield of less than 1%, it is important to shift the focus to Microsoft’s long-term potential and sustainability. Let’s address these points and more in this article.

As Mrs. Marie Barone famously said on the sitcom Everybody Loves Raymond, “A good mother checks.” Similarly, a good investor should always check. Annual dividend increases serve as valuable checkpoints for strong companies like Microsoft. It’s like going for an annual wellness visit – necessary for everyone, even the healthy individuals.

In previous articles, I have analyzed Microsoft’s dividend increases and now it’s time to evaluate the company’s latest dividend raise. Before diving in, let me clarify that my most recent coverage of Microsoft was ahead of their Q4 earnings, when I cautioned that the stock was a bit pricey despite expecting strong results. Since then, Microsoft shares have declined around 5%, while the broader market has only dropped 1.70%.

Without further ado, let’s review the key aspects of Microsoft’s dividend increase.

New Yield: Growth Outweighs Yield

The new annual dividend of $3 per share gives Microsoft a yield of 0.92%, which is slightly lower than the 1.12% following the previous year’s dividend increase. However, this decrease in yield can be attributed to the stock’s impressive 35% run since September 2022. Though the yield may seem small compared to the potential for stock growth, Microsoft’s decision to increase the dividend by 10% demonstrates that the company has better plans in store.

Payout Ratio: Balancing Shareholder Value and Investment

Despite 14 consecutive years of dividend increases, Microsoft’s payout ratio, based on forward earnings per share (EPS), remains healthy at 27%. While this is a slight increase from last year’s 26%, the long-term trend shows a significant decrease from 46% in 2014. This indicates that Microsoft is confident in reinvesting in itself to generate higher returns in the future instead of solely prioritizing immediate shareholder payouts.

Dividend Growth Rate (DGR): Increasing Predictability

Over the years, Microsoft’s dividend growth rate has become more predictable. Previously ranging between 10% and 25%, the recent data shows a tighter range of 9.68% to 10.87%. This increased predictability in dividend growth is excellent news for investors seeking dependable dividend income.

MSFT DGR

Extrapolation: Conservative Estimates for Future Growth

Looking ahead, if Microsoft’s earnings continue to grow at the expected rate of 15% per year, the earnings per share could reach $22 in five years. Even if the payout ratio remains at 27%, which is already low, investors could enjoy an annual dividend of around $6 per share. This would represent a doubling of the current dividend. However, it is essential to remember that these estimates are conservative, and Microsoft’s dividend coverage remains exceedingly strong. Furthermore, there are other positive factors to consider.

MSFT Extrapolation

Forward-Looking Thoughts and Conclusion

  • The recent 35% increase in Microsoft’s stock price poses a challenge when analyzing the dividend yield and making a “Buy” recommendation. The stock has reached all-time highs but is currently in a holding pattern, making it difficult to determine the next move.
  • Confirming the stock’s holding pattern, technical indicators, such as the Relative Strength Index (RSI) at 55, suggest that the market is waiting for a clear direction. However, the stock’s position below various moving averages, except for the crucial 200-day moving average, indicates potential downside in the short to medium term.
MSFT Chart
  • Returning to the dividend, assuming a 15% annual earnings growth rate, earnings per share could reach $22 in five years. Even with the current low payout ratio, this would equate to an annual dividend of approximately $6 per share, doubling the current amount. Therefore, it’s crucial to consider the overall package when evaluating strong companies like Microsoft, rather than focusing solely on the current yield. Those who invested during Microsoft’s previous “lost decade” have enjoyed a yield on cost above 12%, highlighting the potential for long-term returns.
  • Despite the possibility of another “lost decade” in the future and unknown technological disruptions, Microsoft’s extensive ecosystem positions the company to not only survive but thrive during challenging economic times. Microsoft has proven its resilience through various historic events, including market crashes and financial crises. This track record, coupled with the company’s 14th consecutive annual dividend increase, instills confidence in Microsoft’s longevity.
MSFT Ecosystem
  • In summary, Microsoft offers a comprehensive package fulfilling personal and enterprise computing needs. From an investing standpoint, the stock provides a combination of current income, significant potential for capital and dividend growth. Despite the current market conditions and the stock’s valuation, Microsoft remains a “Strong Hold.” It’s difficult to predict how long Microsoft will continue its success, but if I had to choose one technology company with the longest-lasting impact, it would be Microsoft.

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