How Much Will Microsoft Raise Its Dividend?

| About: Microsoft Corporation (MSFT)

Late last year, an interesting debate took place regarding Microsoft (NASDAQ:MSFT). It was time for the dividend to be raised, but by how much was the question. The prevailing opinion was that a raise to a range of 18 to 20 cents per quarter was coming, and Microsoft decided on the 20. Well, we are again approaching the dividend raise time, and this year, there are some extra factors Microsoft will want to consider. So let's debate this again. How much should it raise the dividend?

Now, when we look at some of the big tech names, there has been a number of dividend announcements since Microsoft last increased its dividend. First, the giant in the room, Apple (NASDAQ:AAPL), announced plans to initiate a dividend later this year. It surely has enough money to do so. Also, Cisco Systems (NASDAQ:CSCO) raised its dividend earlier this year, and I recently argued why Intel's (NASDAQ:INTC) raise makes that stock an even stronger value proposition. Now it's Microsoft's turn. Also, in news that was announced even after I started working on this article, computer company Dell (NASDAQ:DELL) announced that it would be initiating a dividend next quarter. That seemed to be a surprise.

So first, let's look at where the dividends stand today for these names. The payout below for each is the current, or planned (in the case of Apple and Dell), dividend for each. I've also put the Intel increase into the table. The yield number below is presented on an annual basis.

Payout $0.80 $10.60 $0.32 $0.32 $0.90
Stock Price $29.29 $576.16 $11.97 $16.79 $26.52
Yield 2.73% 1.84% 2.67% 1.91% 3.39%

So right now, Microsoft has the second-largest dividend, with Intel leading the way. Strangely enough, Dell initiated a dividend almost at the level Microsoft is paying. Apple and Cisco trail for now, but we can assume that there will be some nice raises from Apple in future years if its cash hoard keeps growing as it is now.

Now let's analyze Microsoft's financial situation. As you can see from the following table, Microsoft has the second-largest cash and investments pile of the group (ST = short term, LT = long term). These numbers are as of the last reported quarter for each, and some totals may be off due to rounding.

Cash & Equivalents $6.39 $10.12 $12.81 $6.46 $4.43
ST Investments $53.14 $18.42 $0.90 $41.95 $9.32
LT Investments $9.07 $81.64 $4.84 $3.52 $1.32
Total $68.60 $110.18 $18.56 $51.93 $15.07

So when Microsoft reported its fiscal third quarter roughly two months ago, it had nearly $69 billion in cash and investments on the balance sheet. In total, it had over $118 billion in assets and just $49.35 billion in liabilities. So the cash and investments pile could pay off all of the liabilities now, and it would still have roughly $19 billion left. That's quite impressive. When the company reported the same fiscal quarter a year ago, it had $60.9 billion in cash and investments. So even after all of the dividends and all of the buybacks, the cash and investments pile has grown, and quite nicely.

At the current 20 cent dividend per quarter, Microsoft is paying out roughly $1.68 billion per quarter, or about $6.7 billion per year. You can find the recent dividend history in Note 16 of the latest 10-Q filing.

Microsoft currently has about 8.4 billion shares outstanding, so each penny of a dividend equals $84 million per quarter, or $336 million per year. Now, it has increased the cash and investments position by a little more than $7.5 billion in the past year. I figure that the company will take about 20% of that increase for an increase in the dividend, which works out to $1.5 billion. That would mean a dividend raise of 4 to 5 cents per quarter, putting the dividend at either 24 or 25 cents. The conservative side of me says 24 cents would be nice, which would be a 20% dividend raise. However, if it put it at 25 cents per quarter, it could then say it has a $1 a year dividend. My best guess would be around those two numbers, but if you want an extended range, I would say 22 cents would be the lowest and 27 cents the highest. The raise will be coming in the next few months.

Microsoft is expected to increase its dividend next quarter, and my bet is currently on a four-to-five cent raise. Last year it increased it by four, and the financial flexibility is only getting stronger. A raise to 25 cents per quarter would bring the yield up from 2.73% to 3.41%, at current prices. That would put it right at the yield of Intel currently. As noted, Apple and Dell have announced dividend initiations lately, and Cisco just started its last year. Microsoft and Intel are the two dividend giants, and that is unlikely to change soon. Microsoft is a great value, and there still is some growth from its products ahead. Don't forget that this company is buying back billions of dollars in stock a year. Microsoft is leading tech value play, and that is likely to continue.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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