In the last 12 months, Microsoft’s stock price has run up nearly 24%, and it is now trading above its recent 52-week highs. In fact, Microsoft is now regularly making new 52-week highs thanks to the steady increase in cloud-based revenues. But there is one more factor that is going unnoticed due to Microsoft’s surging stock price: its current dividend yield of around 2.4%. Despite the run up, the yield is still good, and there are several reasons an investor should consider adding Microsoft to his portfolio.
A company’s ability to grow sales is an extremely important factor when considering its future dividend-paying potential. Procter & Gamble (PG) is a clear example of how quickly things can go wrong if sales take a hit. After increasing dividends continuously for decades, P&G struggled to maintain its sales and had to slow down its dividend growth rate.
Microsoft, due to the forward-looking nature of its cloud business -- not to mention its ever-dwindling dependency on Windows revenues -- is on track to keep increasing its sales. If sales keep growing, it will have even more money to plow into dividends and share repurchases.
Microsoft’s cash position is almost as good as it gets for a tech company. At the end of the second quarter 2017 Microsoft had $122.78 billion in cash and short-term investments. The balance sheet is strong enough to give Microsoft plenty of room to keep increasing dividends in the near to medium term. The pile of cash also allows Microsoft to steadily keep repurchasing shares. In the last two quarters it spent $7.9 billion on share buybacks.
Microsoft has always been active in buying back its own shares. In 2007 it had 9.886 million shares outstanding, which came down to 8.013 million shares by the end of 2016. The lower the number of shares outstanding, the lower the amount of dividends the company pays, which, in a way, allows the company to keep increasing dividends.
Microsoft’s payout ratio is 52.7%, and there is plenty of room for it to keep increasing dividends. In the first six months of the current fiscal Microsoft paid $5.824 billion in dividends; operating income was $11.402 billion, and operating cash flow was $17.842 billion.
Microsoft is sitting on a pile of cash, its balance sheet is as strong as you will see and its current dividend bill looks small when factoring in operating income and operating cash flow. The best part is, Microsoft’s sales will steadily growing over the next decade, which will allow even more room for it to keep increasing dividends. At 2.4%, Microsoft’s dividend yield is a steal.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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