As legacy tech giant Microsoft Corp. (MSFT) gears up to increase its dividend as usual around mid-September, investors can expect a more generous dividend payout than forecast, according to a recent report from Morgan Stanley and as reported by Barron's. (See also: Microsoft Surpasses Alphabet in Market Value.)
IT Giant Benefits from Tax Reform, Solid Earnings Growth
In a note to clients Monday, Morgan Stanley's Keith Weiss noted that for the last eight years, Microsoft's board has announced a dividend hike on the third Tuesday of September. "If this holds true in 2018, the announcement would come on September 18," he wrote.
Morgan Stanley attributes its forecast for a larger-than-average increase in Microsoft's dividend to two main factors. For one, the analyst highlighted upside from the GOP tax overhaul passed in late 2017, which slashed the corporate tax rate and incentivized overseas cash repatriation. The Seattle-area company was one of many tech titans hoarding cash in lower-tax jurisdictions abroad. The tax holiday freed over $130 billion in cash offshore, according to Weiss. He also cited a 20% growth in Microsoft's earnings before interest and taxes (EBIT) in the firm's fiscal year 2018, ended June 30.
Over the past eight years, Microsoft has increased its dividend by 3 cents to 5 cents, according to Weiss. It has grown from 13 cents a share in 2010 to 42 cents currently.
Bulls have cheered Microsoft's successful restructuring to maintain its leadership position in the next era of tech, doubling down on growth markets such as gaming, cybersecurity, the Internet of Things (IoT) and cloud computing. This week, the company announced a new subscription offering, bundling its Xbox game console with some of its best services for a monthly fee.
Weiss, who rates shares of the global IT behemoth at overweight, expects shares to gain 16.5% over the next 12 months to reach a price target of $130. (See also: Microsoft Turns to Subscription Model for Xbox.)