Microsoft Takes A Page From Apple's Playbook

| About: Microsoft Corporation (MSFT)
This article is now exclusive for PRO subscribers.

Yesterday Microsoft (NASDAQ:MSFT) announced that it was increasing its dividend payout 22% and reauthorizing and extending a $40B buyback program. The giant from Redmond seems to be taking a page directly out of the recent playbook of Apple (NASDAQ:AAPL). Investors might recall that activist manager David Einhorn took a stake in Apple in February of this year. He agitated aggressively to return more of the company's massive ~$145B in cash and short term securities to its shareholders.

The advocacy soon resulted in Apple raising its dividend some 15% and announcing the largest stock buyback ($60B) in corporate history, of which it has already bought back some $16B at the close of the last quarter. It also floated one of the largest debt issuances ($17B) ever in the market, which fortuitously turned out near the bottom of the interest rate cycle.

Like Apple, an activist (ValueAct) has taken an almost 1% stake in Microsoft and has already been offered a conditional board seat. As I stated two weeks ago, any dividend increase of 15% or better would be a good sign that Mr. Softie is growing more committed to returning cash to shareholders. The buyback is a mild positive as it extends an expiring effort, but the new program has no expiration date. I would look for the company to continue to take $1B to $2B worth of stock out of circulation each quarter given the company's over $70B cash hoard.

Another catalyst could come from the company's upcoming analyst day. Investors & managers will be listening intently for updates on Microsoft's two fast growing "cloud" businesses (Azure & Office 365) which are both already at $1B plus annual run rates. More importantly, they will be listening for any clues on who will replace CEO Steve Ballmer who recently announced his attention to retire. This will be one of the most important decisions for shareholders that Microsoft has made for years if not a decade.

So where does all this leave investors? The large dividend increase raises the floor for the stock nicely in my opinion as I do not see shares going under a 3% yield. Similar measures from Apple also have seemed to raise the floor of its trading range as well. Microsoft has an AAA rated balance sheet (better than the U.S. government) and I think 10-year treasury yields have plateaued after their quick ascent over the past three months.

Revenues should rise between 5% to 7% both for this fiscal year and FY2014. MSFT is not expensive at around 8x forward earnings once its cash holdings are taken out of the equation. I think shareholders are being nicely compensated here while they await who will be Microsoft's next CEO, what will happen with its recently announced Nokia (NYSE:NOK) acquisition, what other shareholder friendly measures ValueAct will be successful in getting the company to undertake. I am holding this stock currently with an optimistic outlook as I think positive changes are a coming to this sleeping software behemoth.

Disclosure: I am long AAPL, MSFT. 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.