If you believe history is bound to repeat, Microsoft (NASDAQ:MSFT) may have something to say to its shareholders Tuesday. But if mum is the word, don’t despair — a collared position with capital appreciation in mind and protection the last word, remains a smarter, risk-adjusted approach in going long MSFT stock. Let me explain.
By the end of the day today, Microsoft stock is likely to have made income investors feel a bit better about their investment. Historically, the company has announced a boost to its dividend in each of the last eight Septembers, on the third Tuesday.
According to broker Stifel, Microsoft’s friendly dividend trend implies an increase in the neighborhood of 10% to 15%. That would bump MSFT stock’s yearly payout to between $1.85 and $1.93 per share for a yield of 1.6% to 1.7% versus Monday’s 1.5%.
The average boost to the MSFT stock dividend the last eight years has been 14.2%, and in 2012 ago the company announced an outlier increase of 25%. So what will this year usher in?
As stated prior, it’s likely the cat is out of the bag already regarding MSFT’s payout stream to its shareholders. Still, even if history fails to repeat, there’s no reason to not bank on another trend in Microsoft continuing — namely a bullish run in MSFT stock and additional capital appreciation for investors.
MSFT Stock Weekly Chart
Since eclipsing its 1999 Dot.bomb highs nearly two years ago, a rebooted Microsoft has been very friendly for shareholders. MSFT stock’s fairly steady uptrend has gained about 87%, or roughly 90% when accounting for the company’s dividend.
It has been a nice run to be sure. But other than a Microsoft shareholder being in the enviable position of trimming a profitable stake and reducing risk, calling a top and pulling the plug on a position seems silly. Bottom line, MSFT stock is still working for investors and chugging along without any real signs of extreme pricing danger off or on the price chart.
Microsoft Stock Collar
Our bullish view on MSFT stock doesn’t mean we’re oblivious of downside risks. Microsoft stock isn’t nearly as cheap as those days when shares were out of favor and not a contender for the next $1 trillion company behind Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN). Also, this is the stock market, and most anything is possible on a short-term basis. As such, once more hedging our enthusiasm with a collar position makes sense.
Reviewing Microsoft’s options and shares at $112.14, the Nov $105 put/$120 call collar for $112.39 is favored. For an additional premium of 25 cents versus purchasing MSFT stock by itself, this fully hedged, adjustable spread guarantees protection below $105 in the event uglier seasonal tendencies in the market reveal themselves or investors simply opt to turn sour on Microsoft. Regardless, that’s nice protection to have in place.
On the upside, if we’re correct in anticipating that Microsoft shares have room to run higher, profits are initially capped at $120 for a maximum gain of $7.61 at expiration. That’s the equivalent of 6.7% over the next two months and pretty much in keeping with MSFT’s current uptrend and year-to-date gain of 31%. Lastly, there’s also a quarterly dividend which will get paid to this investor. That puts the return at just over 7% or perhaps a tiny bit more if one kinder historical precedent does repeat itself.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.