I never thought I would see the day when I started to like Microsoft (MSFT) as a dividend stock. While the current 2.2% yield is not high enough for our client accounts (as it does not pay more than the 10 year bond), I do own the stock in my personal account. Microsoft used to be the stock to own back in the bubble days of the new century. Today, it is written off as a stodgy, low growth, boring company. As I look more closely at the financials, I am beginning to like what I see.
Although the dividend has not increased in 2 years, the current 2.2% sure beats a lot of interest bearing accounts out there. While not as safe as holding cash, when I look at the balance sheet of MSFT, I realize there is not a lot of risk in the company at the moment.
As of this writing, MSFT sports a $207.7 billion market cap, of which $36.7 billion is cash or what I call cash equivalents. MSFT carries about $12.5 billion of long term debt and other liabilities. As an excercise, let's pretend they use their cash to pay off these debts, leaving them with $24.2 billion in cash. This would leave a near enterprise value of $183.5 billion if we strip the remaining cash out.
Now pretend Microsoft is able to borrow $183.5 billion (it will never happen) at 6.5% interest as a AAA credit rating. Microsoft would use this money to buy itself. The interest on this debt would cost $11 billion per year. Last fiscal year, MSFT made $22 billion in free cash flow. They paid out $4.6 billion in dividends that they would not need to pay anymore and they bought back $9 billion in stock, which is no longer needed since they own 100% of the stock in our fantasy story here. After paying the $11 billion in interest costs, MSFT would have $11 billion left over, which is a decent 6% return on their investment.
I run through that exercise to show that MSFT has a rock solid balance sheet and could easily finance itself. It would be a good investment if it could. If buying itself is good for the company, you have to wonder if it is good for you too.
With the current 2.2% in dividends and the 4.3% "yield" in stock buybacks, shareholders are getting the equivalent of a 6.5% yield for owning a company that has one of the best balance sheets in the world. If MSFT decided to pay out all of its free cash flow, the dividend yield would be over 10.5% currently.
MSFT has habitually frustrated shareholders for not giving their cash hoard back. I have to ask though, should they just yet? I can understand that claim if growth had stalled and there is no better use for the money, but the company just recently had one of the better performing years in its history. With over 50% of sales now coming from overseas, it seems they are set up to take advantage of the growing Asian and emerging markets going forward.
I never thought I would say it, but it's time to start looking at MSFT as an income stock.
Disclosure: Long MSFT in personal account