Buy Microsoft As It Could Double Its Dividend To A 7% Yield

Jan. 3.13 | About: Microsoft Corporation (MSFT)

Microsoft (NASDAQ:MSFT) shares are trading near the 52-week low and that is making many investors wonder if this is a buying opportunity or a value trap that could keep dropping just as Hewlett Packard (NYSE:HPQ) shares have done over the past several months. Not long ago, Microsoft launched the latest version of its operating system called "Windows 8" as well as its "Surface" tablet. Many investors and analysts were hoping that Windows 8 would ignite an upgrade cycle for the PC industry which has seen tough times due to a weak global economy as well as new competition from the popularity of tablets. Unfortunately, sales for Windows 8 and the Surface tablet have been seen as disappointing by a number of industry observers. A recent CNBC article points out some of the disappointment for Microsoft's latest operating system and the Surface tablet, and it states:

"Emmanuel Fromont, president of the Americas division of Acer, the world's No. 4 PC maker, said sales of the company's Windows 8 PCs had been lower than expected. He said one factor was the system's unfamiliar design, which appeared to be making consumers cautious. "There was not a huge spark in the market," Mr. Fromont said. "It's a slow start, there's no question."

This leads many to wonder whether Microsoft CEO Steve Ballmer is going to be able to keep his post for much longer. It also leads to the question of what the company can do to create more shareholder value in the future. CNBC's Herb Greenberg has made a couple of seemingly bold predictions for 2013 and two of them include his belief that Microsoft will see a change in the CEO position with Mr. Ballmer leaving and Bill Gates resuming the role of CEO. Furthermore he believes that the company will more than double its regular dividend.

While these predictions may sound bold at first glance, it does make sense that with the stock price seemingly stagnant and with two major product introductions being billed as disappointing by many in the industry, a CEO change might be necessary in the future. As for the dividend being increased substantially, the company does have a strong enough balance sheet to increase the payout. The company has about $66 billion in cash and just around $12.4 billion in debt. It also has a history of doubling the dividend in the past. For example, in 2008, the quarterly dividend was 11 cents per share and thanks to steady increases, it has more than doubled to 23 cents in just about 5 years. Microsoft currently pays out 92 cents per share annually and this provides a yield of 3.5%. Analysts expect the company to earn about $2.88 per share in 2013, so based on that and the strength of the balance sheet, Microsoft certainly could afford to double the dividend from 92 cents to $1.84 per year. This would provide investors who buy now with a yield of about 7% and the company would still have a reasonable dividend payout ratio and a very strong balance sheet. While Microsoft might not be the most exciting tech company, it still has major and recurring revenues from the Windows operating system, plus a leading video gaming system with the Xbox, and potential growth from Skype. With balance sheet strength and dividend growth potential, Microsoft offers investors a great place to park some money at a low valuation of just about 9 times earnings. This stock is likely to outperform many low yielding bonds and if Bill Gates comes back to the CEO position, it might just spark more interest in the stock as well.

Here are some key points for MSFT:
Current share price: $26.71
The 52 week range is $25.76 to $32.95
Earnings estimates for 2012: $2.88 per share
Earnings estimates for 2013: $3.21 per share
Annual dividend: 92 cents per share which yields 3.5%

Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.

Disclosure: I am long MSFT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.