CAN MICROSOFT KEEP GROWING ITS DIVIDEND?

By Luis P. Lopez

Microsoft (NASDAQ: MSFT) first paid dividends in 2003 and has since been paying and increasing the payouts consistently in each quarter until today. In 2000 when the tech bubble burst, investors were wary of investing in tech stocks, but Microsoft continued to register strong growth in its topline and profitability over the years. The company’s powerful financials allowed it to reward shareholders in the form of generous dividends, making it a prime choice of income growth investors. 

While Microsoft’s historical dividend payouts performance has been phenomenal, the million-dollar question is: are the dividend payouts sustainable in the near and medium future? Read on to find out. 

Recent Dividend Payouts and Share Buyback Program

In September 2021, Microsoft’s board of directors declared dividends at the rate of $0.62 per share, which is an 11% increase over the previous year’s quarter. At the current rate, shareholders can expect to get dividends of $2.48 per share annually. This will take the dividend yield of Microsoft stock to 0.8%, which is close to the industry average. Keep in mind that, in 2003, Microsoft initiated its quarterly dividend at just $.08 per share. Microsoft has been the definition of a dividend growth stock. 

The board also announced its biggest ever stock buyback program of $60 billion, which translates into around 2.7% of the stock’s current market capitalization of $2.22 trillion. The company’s peers in the tech sector, such as Alphabet, Meta Platforms (formerly Facebook), and Amazon don’t pay dividends but have stock buyback programs to return capital to their shareholders and increase their ownership in the company, among other benefits. Between 2019 and 2021, the company spent around $55.6 billion on repurchasing stocks, out of which $21.8 billion were spent during the fiscal year 2021 alone. 

Earnings Forecast

The current year’s increase of 11% in dividends is lower than the compound annual growth rate of around 13% that Microsoft has been generating over the past decade. Still, the dividend growth rate this year is above the previous five years’ cumulative average growth rate. Analysts are bullish about Microsoft performance as they expect Microsoft’s EPS to grow by 7.8% in 2022, with a dividend payout ratio to stay around 29%. This is after the company generated a 26% year-over-year increase in EPS over the previous five years. Analysts predict that the company’s EPS will grow by approximately 16% over the next five years, which shows that the revenue growth will be impressive as well. 

How does such a huge company just keep growing? Microsoft CEO Satya Nadella has famously reinvigorated growth by positioning the company as a leading provider of cloud computing services, as well as growing the video game franchise. The newest prospect for outsized growth is the “metaverse,” a kind of virtual reality that could be just as important to 21st century computing as MS Windows was to 20th century computing. 

Q2 2022 Earnings Report

Microsoft reported revenue of $51.37 billion in Q2 2022, an increase of 20% from the same quarter last year.  The net income during the quarter also increased by 20% from a year earlier to 18.77 billion while EPS during the quarter came in at $2.48. The company beat analysts’ forecasts in revenue and EPS both. Its Intelligent Cloud segment revenue grew by 25.5% year over year during the second quarter of 2022. The Azure and other cloud services segment revenue generated a year-over-year growth of 46%. Other revenue segments also registered significant growth during Q2 2022. 

The operating margin of the company was 43% during the quarter, which is a significant improvement from the previous year’s operating margin of 41.5%. The healthy operating margins allow the company to go ahead with its ambitious stock repurchase programs. 

Can Microsoft Keep Growing Its Dividends?

If we go by analysts’ estimates for the next five years, we can expect Microsoft to continue paying out higher dividends for the next five years, at least. The tech company is known for generating earnings surprises and beating analysts’ expectations, and the strong financials and business model of the company also points to the same. This might convince us to believe that it will keep growing its dividends in the coming years. 

While the dividend yield of under 1% might turn off some investors, investors can expect that the tech giant’s dividend CAGR would be around 10% over the next five years. Also, the dividend yield of less than 1% is at par with the industry average, but investors should not rely on this metric alone. Higher stock prices can subdue the dividend yield, which is true in Microsoft’s case as its price has been surging of late. If the share price zooms upwards faster than the dividend payout, then the dividend yield can look artificially low. Microsoft’s stock price has grown so fast lately, that the dividend yield is distorted. Remember, Microsoft investors have seen the dividend grow by a factor of 8 since 2003! 

Microsoft currently pays out around 29% of its earnings as dividends, and there are ample earnings to cover the distributions. With the possible strong growth in revenue and EPS in the upcoming years, shareholders should enjoy substantial growth in dividends.