A Microsoft Dividend Increase Could Spur New Highs For The Stock

| About: Microsoft Corporation (MSFT)

Shares of technology giant Microsoft Corporation (NASDAQ:MSFT) have rallied lately, crossing $31 on Thursday thanks to the broad market rally. Other than a day or two here and there, the last time we saw shares this high was in late April and early May. Microsoft closed Thursday at $31.34, up 95 cents for the day, and closed at its highest level since May 3.

Microsoft is now about $1.60 from the 52-week high of $32.95. With shares approaching new highs, the question is, what can keep this rally going? Well, Microsoft could announce a dividend increase within the next few weeks, and that positive news could spur new highs in this name.

Microsoft last declared a dividend on June 13. Three months from that date is September 13, or next Thursday, so we would expect a dividend announcement around that time period. Now, if I were Microsoft, I would either announce my dividend early next week, like Monday or Tuesday (at the latest), or I would wait until the following week. Why is that? Well, Apple Inc. (NASDAQ:AAPL) has an event next Wednesday, where it is expected to launch its new iPhone. Also, the Federal Reserve is meeting Wednesday and Thursday, so I think the second half of the week will be dominated by that news.

I would think Microsoft would want its dividend news to be a huge deal, so why announce it with so much other news going on, especially because Apple and the Fed will dominate news feeds. If Microsoft doesn't declare the dividend by Tuesday, it should probably wait until the following week where it can grab the headlines.

Now, Microsoft has paid $0.20 a share in dividends for the past four quarters, so we are expecting a dividend raise when it declares that next dividend. But how much is the question. Before we try to estimate the dividend, let's look at some key numbers, which I've provided in the following table. The table below shows the amount of cash at the end of each fiscal year (remember, Microsoft's fiscal year ends in June), including both cash and short-term investments. I've also provided the number of shares outstanding at the end of each fiscal year, the associated cash per outstanding share, and the dividend paid in the most recent quarter (before the raises). All numbers are in millions, except per share data.

*Includes cash and short term investments.

Microsoft's cash total has risen by about 19.5% in the past year, with the cash per share rising a little less than that, since the share count rose slightly over that time.

Being that the cash pile and cash per share is up about 20%, I would figure that to be a good estimate for the dividend raise. A 20% raise would put the quarterly dividend at $0.24. At minimum, I would look for Microsoft to increase the dividend by 10%, to $0.22. Using that same 2 cent range on the upside, the maximum would be $0.26 in my opinion. Now, with the Windows 8 launch coming up, and with the launch of the new Surface tablet, I think Microsoft will hold back a little and hold some extra cash, so my best guess would be that $0.22 to $0.24 range.

With Microsoft's close on Thursday, the current yield, based on the $0.20 dividend, is 2.55% annually. If Microsoft were to raise the quarterly dividend to $0.24, the annual yield would jump to 3.06% based on Thursday's close. Where does that stand up against other names? Well, Apple is currently yielding about half of that, but remember, Apple just started paying a dividend again and investors are counting more on growth at this point.

Another name I always look at for dividend yields in this space is Intel (NASDAQ:INTC). I have regarded Intel and Microsoft as the two best value plays in tech-land for their decent dividends and stock buybacks. As of Thursday's close, Intel's yield was at 3.59%. The other name with a comparable yield is Cisco Systems (NASDAQ:CSCO), which now has a yield of 2.83% after raising its dividend 75% after its most recent quarterly results. Microsoft should look to yield at or more than Cisco, but Microsoft does offer a bit more revenue and earnings growth at this point.

Microsoft shares are at multi-month highs, mostly thanks to a broad market rally. But even if the markets do turn negative at some point, Microsoft could hit new highs over the next couple of weeks as investors look for an increase in the company's dividend. I would look for the dividend to be raised by 2 to 6 cents per quarter, meaning my expectation is for the new dividend to be $0.24. Last year, Microsoft came in at the high end of my range, and I'll be very interested to see what it does this year, given an even stronger balance sheet.

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