Trying to Predict Microsoft's Future Dividends: Will It Cross the 3% Yield Threshold?

| About: Microsoft Corporation (MSFT)

There are already several posts on Seeking Alpha recommending Microsoft (NASDAQ:MSFT) as a value play. There are also several dividend investors who are essentially the sort of value investors who focus on initial dividend and future dividend growth of a company as a basis for investment. Many of these investors have an initial cutoff and would buy stocks only if the dividend yield is above 3%.

Microsoft currently pays 16 cents per quarter as its dividend. It has already declared a dividend at 16 cents per share for three quarters and will likely retain 16 cents for the fourth quarter. This annual dividend of 64 cents equates to a dividend yield of 2.68% which is still below the 3% cutoff.

But as Microsoft's dividend has consistently increased annually for the past several years, it would be smart to predict the projected dividend increase and see what would be the projected yield for Microsoft and determine whether it would cross the 3% cutoff.

Microsoft also has hoards of cash and there are already calls for increasing its payout ratio. Various analysts claim Microsoft’s payout ratio is 23%. However this ratio is calculated based on its last four quarters of earnings and last four dividends. This may not be accurate because Microsoft decided to pay 64 cents per year based on its 2010 earnings of $2.10. Though Microsoft might have had some projections about its 2011 earnings, the only certain information it declared regarding its 2011 dividends were its 2010 earnings. This amounts to a payout ratio of 30%. Microsoft is projected to earn $2.63 in 2011, and based on the first three quarters of earnings in 2011, it is well on its way to achieving this projection.

If Microsoft simply maintains its payout ratio of 30%, its annual dividend next year would be 30% of $2.63 which works out to a dividend of 79 cents per share per year. This amounts to a projected yield of 3.3% based on Friday’s closing price of $23.89.

Looking at it another way, Microsoft is expected to grow its earnings from $2.10 to $2.63, an increase of 25%. If Microsoft just maintains the same rate of growth for its dividends, the dividend would grow to 80 cents which would again amount to a dividend yield of 3.3%

Even if the dividend is raised by half that amount, to 15%, the dividend yield would grow to 3.07% which would be above the cutoff of 3%.

Disclosure: I am long MSFT.

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