When it comes to dividend stocks, utilities and telecoms get all the attention, but investors shouldn’t ignore Microsoft Corporation (MSFT) even if MSFT yields only 2.85%.
After all, if you’re looking for battleship dividend payers, Microsoft stock checks almost every box there is.
For one thing, Microsoft is massive. With a mega market capitalization of $400 billion, only Google parent Alphabet Inc (GOOG, GOOGL) and Apple Inc. (AAPL) are larger parts of the market. It’s also as blue as a blue chip can be, counting itself a member of the Dow Jones Industrial Average.
Another attractive aspect of Microsoft stock is that with a five-year beta of 0.93 according to MSN, it’s less volatile than the larger market and tends to hold up better when equities are in trouble.
Most critically, a dividend payer has to be rock-solid reliable on its payouts, and should regularly hike them, as well. On that count, the Microsoft dividend has a 12-year history of steady growth.
And rest assured, MSFT has more than enough firepower to hike its payout even more. The company ended 2015 with more than $100 billion in cash and short-term investments on its balance sheet. Levered free cash flow after paying interest on debt came to $20 billion.
Against those resources, Microsoft can easily afford the more than $10 billion it spent on dividends last year, as well as another $18 billion on share repurchases.
Speaking of share repurchases, only Apple disbursed more cash on buybacks than MSFT over the trailing 12 months ended Dec. 15, according to data from FactSet.
MSFT Could Be a Total Return Machine
Of course none of that largesse matters much if a declining share price more than offsets any return from the dividend. Happily, MSFT looks pretty good on that count too.
True, Microsoft stocks is off about 6% so far this year, but then the broader market is off about 6% as well. It’s just not a good time for stocks, and anything as big and liquid as MSFT is going to take a disproportionate share of selling.
Longer term, MSFT should continue to build on the big gains it saw in 2015, thanks to the early returns on its big transition. Indeed, Microsoft added 19% in 2015, a year in which the S&P 500 was flat.
That performance was attributable to the promising progress the software company is showing in its pivot to providing cloud-based services. Microsoft missed in mobile, and sales of PCs are a slowly melting iceberg.
And yet thanks to its focus on enterprise customers, the company’s prospects haven’t looked this good in a long time.
Put it all together and Microsoft stock should ride to multiple expansion and earnings growth, according to analysts at Hilliard Lyons. From a note to clients:
“[Our 17 times forward multiple excluding cash] is justified given our higher conviction in Microsoft’s aggressive shift to cloud services, management’s cost cutting ability, a strong capital return policy and our expectation for healthy EPS growth in fiscal 2016 and 2017.”
The wealth management firm’s price target of $58 a share implies upside of 11% in the next 12 months or so.
The ongoing transition to the cloud might make shares more volatile than usual, but it also gives them potential catalysts with every earnings report.
The Microsoft dividend might not be the biggest on the block, but reliability and potential share price growth could conspire to make a total return machine.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
