Microsoft (MSFT) hiked its quarterly dividend up to 36 cents this week — a 16.1% increase versus its most recent quarterly dividend. Microsoft’s new 36-cent payout gives MSFT stock a dividend yield of 3.26%, putting it in the upper echelon of big, high-yield tech stocks.
Clearly, this dividend raise is good news for Microsoft investors, but perhaps even better is that MSFT stock still has a lot of room for even higher dividends in the years to come.
Over the past five years, Microsoft has increased its quarterly dividend payout from 16 cents to 36 — a 125% increase. If we back up even further to 10 years, Microsoft has upped its quarterly dividend by 350%. Based on Microsoft’s 8 billion shares outstanding, the company will be paying out roughly $11.5 billion over the next year in dividend payments.
If you were to look strictly at MSFT’s payout ratio of 81%, which represents the percentage of net income that a company pays in dividends annually, you might think there is minimum upside in Microsoft’s dividend from this point forward. However, that percentage is misleading.
Specifically, Microsoft took a $7.5 billion impairment charge during its last quarter related to its acquisition of Nokia’s (NOK) hardware business. That $7.5 billion was reported as a one-time cost, reported against net income.
The better way to determine the impact of Microsoft’s $11.5 billion annual dividend payment is with free cash flow — a reflection of a company’s operating income minus its capital expenditures. By doing so, one-time costs won’t seem as relevant, and investors will have a better understanding of whether a company can actually afford its dividend.
That said, Microsoft has free cash flow over $23 billion during the trailing 12 months, which makes its next 12-months of dividend payments approximately half of its free cash flow. That ratio looks a lot better than MSFT’s 81% payout ratio, and proves that Microsoft’s dividend payment is quite manageable for the company.
MSFT Dividends Will Keep Going Higher
Microsoft is in a really good position for dividend hikes in the future, thanks to its large cash haul. This is a company that has about $100 billion in cash & equivalents on its balance sheet. That cash can be used for acquisitions, stock buybacks and paying off its very manageable debt position of $35.2 billion.
Even after Microsoft’s dividend payments of $11.5 billion next year, it will still have another $11 billion remaining after all capital expenditures. That’s a lot of money, and suggests that MSFT’s cash position will continue to increase despite the current payout. With that amount of extra cash, Microsoft is likely to keep hiking its dividend payout over the long term, just like it has in the past 10 years.
Meanwhile, Microsoft also has a cloud business that’s growing at a triple-digit rate and is on pace to deliver $8 billion in 12-month revenue. It has double-digit revenue growth for both Xbox and Internet search with Bing. Lastly, MSFT stock trades at just 14 times next year’s earnings.
In other words, MSFT is a promising company with a high dividend yield. Buy Microsoft for the long haul and watch the dividend payments continue to rise.
As of this writing, Brian Nichols did not hold a position in any of the aforementioned securities.