Microsoft Increases Dividend By 15%

By Greg McFarlane | October 11, 2012 AAA

It might not get the headlines that more recent upstarts such as Google (Nasdaq:GOOG), Amazon (Nasdaq:AMZN) and Facebook (Nasdaq:FB) do, but Microsoft (Nasdaq:MSFT) remains an ubiquitous technology stalwart and will be so indefinitely. It's not exactly a secret that Redmond's mighty redwood still has a near-monopoly on the office suite market. It's estimated that the active variants of Windows (7, Vista, XP) are the operating system of choice for five out of six computers around the world. Plus, with the Xbox, Microsoft is one of the leaders (if not the leader) in the current-generation gaming consoles market in operation today. Microsoft isn't "sexy", and hasn't been for decades if it ever was, but its size and profitability are almost without peer. With the recent news about Microsoft increasing its dividend once again, investors may want to take another look at this not-so-sexy company.

A quarter-trillion dollar company sitting on $7 billion in cash and cash equivalents (CCE) and another $56 billion in short-term investments has an interest in making itself attractive to investors. In that spirit, last month Microsoft increased its quarterly dividend from 20 cents to an unprecedented 23 cents. Hold on to a stock that's currently trading at around $30 for a year and you'll receive 92 cents for your trouble, a dividend yield of about 3.1%. That's significantly higher than IBM's (NYSE:IBM) 1.6%, Oracle's (Nasdaq:ORCL) 0.8%, or most of Microsoft's other contemporaries that pay out dividends. (One glaring exception being Intel (Nasdaq:INTC), with recent dividend yields closer to 4%.)

Not Generosity
Why the generosity from Microsoft? First, it's not generosity. It's important to remember that no successful business ever gives the store away and especially not any blue-chip companies. Paying cash out to shareholders encourages said shareholders to hold onto Microsoft stock, adding stability and making selloffs less likely. Furthermore, the dividend increase isn't even necessarily that altruistic. Almost all of that cash and those short-term investments are held outside the United States. Keeping that money offshore reduces Microsoft's tax liability - more on this later.

Microsoft first announced a quarterly dividend in 2003. That dividend, originally 8 cents, has increased consistently ever since, usually in 1 cent increments. While a 15% increase in the dividend is large, it's not Microsoft's largest. In fact, it was exactly a year before this current boost that Microsoft announced its previous dividend increase, a robust 25%.

Not surprisingly, Microsoft's stock price has been remarkably stable since that first dividend payment nine years ago, with only a couple of hiccups. Given the number of outstanding shares, the latest increase will cost Microsoft $1 billion. This might sound unnecessarily expensive, but such transactions don't occur in a vacuum. Remember where much of Microsoft's cash is located, geographically speaking. It would cost Microsoft far more than $1 billion to bring that cash stateside, as the United States continues to employ one of the highest corporate tax rates in the world.

Beyond that, failing to increase its dividend would make Microsoft stock less desirable. Investors have options and could instead place their money where they'd have a greater likelihood of receiving regularly scheduled cash payments. For investors more interested in income than capital appreciation, this is vital. It's also one of the reasons why companies such as Google have never paid a dividend: once you do, it's almost impossible to stop. After much reluctance Microsoft's largest competitor, Apple, will start paying a dividend later this year. That's in its third decade after first trading publicly.

Recovering Past Glory
In the late 1980s and early 1990s, Microsoft was regarded as the most forward-thinking company of its kind, in this unfamiliar new technology realm. The company supplanted such giants of yesteryear as Exxon (NYSE:XOM) and General Motors (NYSE:GM) as the world's most valuable. But as the years passed, while Microsoft remained influential and formidable, the company took on a new persona - and not necessarily an enviable one. It was decried as unreceptive, stodgy and unimaginative, which is about the worst thing you can call a technology company. Much of the company's software was regarded as plodding and uninspired, particularly when contrasted with its flashier peers.

But that's changing. The upcoming Windows 8, rumored to be the final version of the perennial operating system, is scheduled for formal release later this month and has been universally praised since its May release preview. Windows 8 represents the most profound advance from a particular Windows version's predecessor since Windows 95 replaced Windows 3.1. Microsoft's new mobile operating system, Windows Phone, is an exponential upgrade over previous mobile operating systems that included the forgettable Pocket PC and Windows CE. With an exciting new product line, continued market dominance in its traditional market segment, and now a new higher dividend, Microsoft could well develop into something even more substantial in its next iteration.

The Bottom Line
There is money to be made from Microsoft dividends, but investors need to hurry. If you want a taste of that sweet, sweet Microsoft dividend candy, buy now. The company will pay the new 23 cent dividend out on December 13, to investors who were holding the stock on November 15.

At the time of writing, Greg McFarlane did own shares in Microsoft. The writer did not own any shares in any of the other companies mentioned in this article.

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