In each of the past two years, I've written a preview article discussing how much I expect Microsoft (MSFT) to raise its dividend that year. Those two articles are found below:
- 2011 - How Much Should Microsoft Raise Its Dividend?
- 2012 - A Microsoft Dividend Increase Could Spur New Highs For The Stock
Today, I'm back to discuss the 2013 potential dividend raise. I'll first look at the dividend's recent past, and analyze Microsoft's balance sheet to discuss its financial flexibility. I'll also look at how the company's yield has fared since the last raise, and discuss how Microsoft's dividend stacks up against other large cap technology names. Finally, I'll discuss my expectations for the dividend raise.
Microsoft's recent dividend history:
Before we can try to project where Microsoft's dividend is going, it's good to see where it has been. The chart below shows Microsoft's quarterly dividend since 2005, per fiscal year. Remember, Microsoft's fiscal year ends in June, and it usually announces a dividend sometime during fiscal Q1, which ends in September.
*According to Microsoft's dividend history, the first payment in fiscal 2006 was $0.08, before being raised to $0.09 for the final three payments. The chart above uses the $0.09 figure for fiscal 2006.
Microsoft's dividend did not rise very much during the financial crisis, which is to be expected. From fiscal 2007 to fiscal 2010, the quarterly payout went from $0.10 to $0.13. However, the last three raises have been three, four, and three cents, respectively. So in three years, the quarterly payout has gone from $0.13 to $0.23. On an annual basis, that's a rise of 40 cents per year.
How that yield has fared:
It was September 18th, 2012 when Microsoft announced the dividend raise from $0.20 to $0.23 per quarter. That 15% raise was a nice boost to the dividend's yield. In the table below, I've shown how that yield has fared by month, using the average daily closing price (unadjusted for dividends since). June numbers are as of Friday.
*September yield calculated from the 18th on, the day that the company announced the dividend raise.
You can see how the yield jumped during the fourth calendar quarter of 2012 as Microsoft's stock came down a bit on Windows 8 concerns. In early December, the stock bottomed at $26.26, at which point the yield was just over 3.50%. Microsoft's stock has done rather well since the start of 2013, reaching a 52-week high of $35.78 just recently. At that point, the yield was down to 2.57%. As I always say, investors probably don't care about a lower yield given the stock's sizable rally. At Friday's close, Microsoft's yield was 2.67%.
A discussion on the balance sheet:
The table below shows some key balance sheet numbers at the end of fiscal Q3 for Microsoft over the past three years. Fiscal Q3 ends at the end of March, as you can see. Dollar values in millions. For a more detailed look at its balance sheet, here's the recent 10-Q filing.
Microsoft had nearly $74.5 billion in cash and short-term investments at the end of fiscal Q3. However, about $66 billion of that is located outside the United States. That means that just about $8.5 billion is inside the US, to be used for dividends (and buybacks). One might find it concerning that the US cash pile has decreased by about $1 billion over the past year. However, working capital has increased nicely and the current ratio is strong. Microsoft has two options here. It could repatriate some of the foreign money, pay taxes on it, and then use the money for dividends and buybacks. The second thing is to borrow money while rates are low, and use that, like Apple (AAPL) did recently. I'm not worried about the dividend because Microsoft's overall financial flexibility is great. It may just need to be a little creative for the funds used for the dividend and buyback. At this point, I'm guessing it'd go the debt route rather than pay taxes. But at some point if there were to be a US tax holiday, you'd see Microsoft, Apple, and a number of others bring a lot of cash back into the US.
Comparable dividends in large cap technology:
When looking at dividends amongst large cap technology names, there are four companies I look at. Microsoft and Apple are two, with Intel (INTC) and Cisco Systems (CSCO) being the other two. The reason I look at these four is that all of them have dividend yields over 2.50% annually, and market caps over $120 billion each. There are some other names that pay dividends over 2.30% in this space, but their market caps are under $50 billion, so I don't see them as comparable. The following chart shows the four names I look at and their annual yields as of Friday's close.
So far this year, Apple raised its dividend by 15%. At that time, Apple was yielding about 3.00%, but the rally in that stock has pushed the yield back down to 2.84%. Currently, Apple's yield is 2 basis points ahead of Cisco's yield. Cisco also raised its dividend this year, from 14 to 17 cents per quarter. Right now, Intel is the clear leader in large cap technology dividend yield, and has been for some time now. Intel has not raised its dividend this year, and probably will for its next payment. Intel's dividend yield could approach 4.00% yet again, a level it was above for a while, just like Microsoft was above 3.00%.
As of Friday's close, Microsoft's dividend yield trailed Cisco's yield by about 15 basis points, Apple's by roughly 17 basis points, and Intel's by 94 basis points. A decent raise in the Microsoft dividend would put its yield back above that of Cisco and Apple. At this point, I don't think Microsoft's raised yield would be anywhere close to that of Intel, especially once Intel raises its dividend.
Looking at potential raises:
In this section, I'll discuss some potential scenarios when it comes to the dividend raise. For those that were wondering the financial impact of the raise, consider the following. In fiscal Q3 this year, Microsoft paid $1.925 billion in cash dividends. In fiscal Q3 last year, it paid out $1.683 billion. So with the 3 cent raise, it paid out an additional $242 million. At the end of fiscal Q3, there were 8.349 billion shares outstanding, meaning that each additional cent of dividend is an extra roughly $83.5 million in dividend payments per quarter. That number will vary from quarter to quarter as the share count changes.
When it comes to the dividend raise, do not forget that it will be about three months probably until the announcement. In those months, the share price could certainly change, as you saw in the table above. My predictions are based on data we have today, and could easily change in the next few months. If we get into September and something has substantially changed the equation, I'll probably come back with a new set of predictions.
The absolute minimum I could see the dividend being raised is one cent. At 24 cents per quarter, or 96 cents per year, the yield would be up to 2.79%. This would mark a raise of 4.35%, and probably would be a disappointment to many. A raise of 1.5 cents per quarter would get the dividend to $0.98 per year. This 6.52% raise would put the dividend yield at 2.85%, currently on par with Apple.
More realistically, I think a 2 cent raise to $0.25 per quarter would be welcomed. This 8.70% raise would put the annual dividend at $1.00, which is a significant level in one sense. This would push the dividend yield back up to 2.91%. The other possibility that I think is fairly likely would be a three cent raise to $0.26. This would be a 13.04% raise, putting the yield back at 3.02%. I think Microsoft would like to get the dividend yield back above 3.00%, and that will also depend on the stock price. If the stock is at $36 or $38 by the time the company raises the dividend, don't expect to be close to 3.00%.
If you go back to that table above where I showed the monthly average yields, the overall average is about 3.14%. For Microsoft to get back to around that area, the dividend raise would need to be 17.39%, or 4 cents. That would put the quarterly dividend at $0.27, or $1.08 per year. At the moment, this would be the high end of my expected range. An extra 4 cents per quarter probably would cost Microsoft about an extra $1.25 billion per year in dividend payments. I don't see them going this high, not yet anyway.
We're about three months away from what is expected to be Microsoft's next dividend raise. Microsoft's dividend yield has come down in recent months as the stock has raced higher, and a dividend raise would push that yield higher. Microsoft now has the lowest yield of the four large cap dividend paying technology giants, and I'm sure it wants to do something about it. Microsoft's financial flexibility will allow them to raise the dividend, but the question is how much. I would be looking for a 2 to 3 cent raise, meaning the next quarterly dividend will either be $0.25 or $0.26.
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