Look for a significant increase in MSFT's dividend within the next six months

Microsoft’s stock has trailed the broader market for the greater part of a decade, and more noticeably was not invited to the appreciation party the US market has witnessed since the spring of 2010. Ballmer and crew have taken big steps in the past to jump start their stock price when faced with an underperforming stock. Their biggest bet was a massive $3 per share ($32 billion in total) dividend in 2004. The company ended their most recent fiscal quarter with over $50 billion in cash and short term investments which is similar to the over $60 billion the company held the quarter before the 2004 dividend. The main difference between this year and in 2004 is that the company states most of its cash (~$42 billion), is held in overseas bank accounts subjected to repatriation taxes if brought back to the United States.  

Even with the $8.6 billion Skype acquisition announced this week, we believe that Microsoft is primed for another distribution to shareholders.  Although we don’t believe the company has the ability to make another massive distribution, a la 2004, but rather a hefty increase in their quarterly payout is more likely. One of their tech brothers, Intel, just announced that they are increasing their dividend by 16%, the second time in the past six months. Intel’s dividend will now yield roughly 3.6% on an annual basis compared to Microsoft’s 2.6%. Microsoft will most likely feel the pressure from investors to follow Intel’s move. But can the Company afford to do so? And what kind of yield can we expect?

Microsoft generates about $6 billion per quarter in free cash. With that kind of cash generation, coupled with the existing $7 billion in US held cash and short term investments, we believe a payout increase of $.10-.12 per share is probable. This increase would result in an additional $800 million per quarter and total dividend payments of $9.5 billion annually. This increase would give them a dividend yield of 4.6%. Even with this increase, the company would still generate about $10-12 billion in free cash that can be used for other investments and provide more than enough financial comfort.

We believe that the most likely announcement of this dividend will be closer towards their fiscal year end in June or July of this year.

We welcome any comments or discussion points.