Blue Chips

Analyze Microsoft Stock, 10.5% Dividend Growth

Microsoft Stock is not a member of the prestigious S&P 500 Dividend Aristocrats group. However, the company has paid and increased dividends every year since 2004 and has also grown its stock price tremendously over the last decade.

In fact, while the S&P 500 is up 198% over the last 10 years, Microsoft Stock has gained 666% in the same time frame. This is largely attributable to strong revenue growth in Azure Cloud Computing, Office 365 Commercial Applications, acquisition of LinkedIn and  Microsoft Dynamics Software.

Management last raised the dividend from 46 cents a share to 51 cents per share in September 2019. This is a healthy 10.8% dividend growth rate, keeping up with its average over the last 5 years.

In this article, we review Microsoft’s business synopsis, latest financial results as of 3rd Quarter, 2019, dividend growth history, long term stock performance versus the S&P 500 and the S&P Technology Sector (XLK).

Table of Contents

This article is broken down in to sections, feel free to jump to the area that interests you.

Business Synopsis

Microsoft is a global technology behemoth that develops software, devices and solutions that help people and businesses realize their full potential. The company believes human interaction with technology should be more natural and multi-sensory using voice, ink and eye contact as well as touch.

Management is focused on helping people and businesses become more intelligent using its devices, reinvent productivity and business processes and create more personalized computing.

Microsoft reports business results using 3 segments. They are:

1. Productivity and Business Processes

This segment includes Windows 10 and Office 365 bundled together as subscription packages for commercial uses, LinkedIn including talent management solutions and hiring, Dynamics Enterprise Resource Systems (ERP), Skype and Microsoft Teams.

2. Intelligent Cloud

This segment includes server and information storage products like Azure, SQL & Windows Server, GitHub and other cloud computing solutions.

3. More Personal Computing

Includes traditional businesses like Windows OEM and operating systems, Bing and MSN, Xbox and Microsoft Surface.

Attached is a screenshot from the company’s 2019 annual report showing revenue breakdown by segment.

Microsoft Financial Results by Segment

More Personal Computing is still the biggest revenue generator at $45.698 billion but has the slowest growth, at just 8% year over year. Fastest growing business is Intelligent Cloud bringing in total revenues of $38.985 billion in 2019, a splendid 21% growth from 2018.

Revenue Analysis and Share Buybacks

For full year 2019, Microsoft reported revenues of $125.84 billion, a 14% growth year over year from 2018’s total of $110.36 billion. It earned operating income of $42.96 billion and net income of $39.24 billion. This implies an operating margin of 34% and net margin of 31.2% which is very profitable.

Trading on the New York Stock Exchange, Microsoft sports a whopping $1.4 trillion market capitalization and pays a 1.1% dividend yield. This yield is 70 basis points lower than the yield on the S&P 500 index.

Over the last decade, Microsoft has doubled total revenues from $62.48 billion in 2010 to $125.84 billion as of 2019. This represents a compounded annual growth rate (CAGR) of 7.25% which is a strong growth rate for a company the size of Microsoft.

Microsoft has rewarded shareholders by authorizing a $40 billion share buyback plan in September 2013 which expired in December 2016. The Board of Directors authorized another large share repurchase program in September 2016 of $40 billion and as of June 2019, there is still $11.4 billion worth of share to buy back.

Dividend Growth History

Even though Microsoft does not make it to the prestigious S&P 500 Dividend Aristocrats index, it has paid dividends and raised them consecutively for 15 years beginning 2004. Another 10 years of growth and this company will be included in the index.

Microsoft Stock has raised its dividend from 16 cents a share in 2004 to $1.89 in 2019, representing a compounded annual growth rate (CAGR) of almost 18%, which is truly phenomenal. However, dividend growth rate over the last 5 years has slowed to 10.5% as the company spends more free cash flow to repurchase its stock.

Attached chart shows a steady and steep uptrend in Microsoft’s dividend payments since 2004. On the X asis is the Year and Y axis has annual dividends ($) per share.

Microsoft Stock Dividend Growth Chart

Chart below also shows the year over year percent change (growth) in Microsoft’s dividend. It is important to note Microsoft grew its dividend by 100% from 2004’s payout of $0.16 per share to 2005’s payout of $0.32 per share.

On top of this growth, Microsoft also paid a special dividend of $32 billion or $3 per share in 2004.

MSFT Stock Dividend Growth % Year Over Year

Dividend Payout Ratio

Lets calculate the the dividend payout ratio for Microsoft Stock. Dividend Payout Ratio measures how much of a company’s free cash flow is paid out in the form of dividends.

Free cash flow is the cash a company generates from its daily operating activities minus capital expenditures like investing in new plants or equipment.

Free cash flow is calculated from the statement of cash flows, and is not artificially modified using accounting rules or non-cash expenses like depreciation, amortization, fair value revaluations, etc.

In its 2019 annual report, the company states cash from operations equals $52.2 billion while capital expenses totaled $16.876 billion.

Free Cash Flow = Cash from Operations – Capital Expenditures

= $52.2 billion – $16.876 billion

Free Cash Flow = $35.324 billion

Dividends Paid in 2019 = $13.811 billion

Dividend Payout Ratio = Total Dividends Paid / Free Cash Flow

= $13.811 billion / $35.324 billion

Dividend Payout Ratio = 39%

A dividend payout ratio of 39% is excellent because it leaves plenty of cash flow for future dividend raises, making accretive acquisitions that add to the bottom line, research and development costs as well as hiring more sales people to grow revenues.

Valuation and Long Term Performance

Microsoft’s Stock Price has increased from $1.2 per share in January 1990 to $184 as of February 2020. This represents a compounded annual growth rate (CAGR) of 18.3%, which is a stunning long term performance.

As a matter of fact, this performance comes close to Warren Buffet’s 20.9% compounded annual return at Berkshire Hathaway over a period of 53 years.

Attached is a long term monthly chart showing Microsoft’s splendid long term stock performance.

Due to a robust revenue growth of 14% year over year and lack of any exposure to China’s Trade War with America or the Corona Virus, investors are paying a high premium for owning Microsoft Stock.

As a result, Microsoft Stock’s forward price to earnings ratio stands at 32.5 times 2020 earnings. As a comparison, Alphabet aka Google trades at a forward PE of 23.5 while Apple trades at 23.2 times.

Executive Summary

Here is what we like and don’t like about MSFT Stock.

Likes

  • Consistent dividend growth for 15 years, making this a Dividend King Stock.
  • Healthy 10.5% dividend growth rate annualized over the last 5 years.
  • Dividend payout ratio of 40% which leaves room for future dividend growth, smart acquisitions and share repurchases.
  • Robust 14% revenue growth in 2019 and top market leading positions in cloud storage, personal computing, gaming devices, Office 365 productivity software and Dynamics ERP solutions.

Dislikes

  • High valuation of 32.5 times forward 12 month earnings.
  • A low dividend yield of just 1%. The stock price has run up so much that the dividend yield has gotten ever smaller.
Market Capitalization $1.4 Trillion
Dividend Yield 1%
Forward PE Ratio 32.5 times earnings
Dividend Growth (5 Year Avg.) 10.4%
Dividend Payout Ratio 40%
EPS Growth (5 Year Avg.) 12.5%
2019 Revenues $125.84 Billion
Gross Margin 65.9%
Net Margin 31.2%

Microsoft Ex-Dividend Dates and Payment History

Dividend Period Amount Announcement Date Ex-Dividend Date Record Date Payable Date
FY2020 Q2 $0.51 04-Dec-19 19-Feb-20 20-Feb-20 12-Mar-20
FY2020 Q1 $0.51 18-Sep-19 20-Nov-19 21-Nov-19 12-Dec-19
FY2019 Q4 $0.46 12-Jun-19 14-Aug-19 15-Aug-19 12-Sep-19
FY2019 Q3 $0.46 11-Mar-19 15-May-19 16-May-19 13-Jun-19
FY2019 Q2 $0.46 28-Nov-18 20-Feb-19 21-Feb-19 14-Mar-19
FY2019 Q1 $0.46 18-Sep-18 14-Nov-18 15-Nov-18 13-Dec-18
FY2018 Q4 $0.42 13-Jun-18 15-Aug-18 16-Aug-18 13-Sep-18
FY2018 Q3 $0.42 12-Mar-18 16-May-18 17-May-18 14-Jun-18
FY2018 Q2 $0.42 29-Nov-17 14-Feb-18 15-Feb-18 08-Mar-18
FY2018 Q1 $0.42 19-Sep-17 15-Nov-17 16-Nov-17 14-Dec-17
FY2017 Q4 $0.39 13-Jun-17 15-Aug-17 17-Aug-17 14-Sep-17
FY2017 Q3 $0.39 14-Mar-17 16-May-17 18-May-17 08-Jun-17

Microsoft Stock Price

The most recent price for Microsoft Stock can be found by going to the company’s Investor Relations website and clicking on Microsoft Stock Price Lookup.

What's your reaction?

Excited
0
Happy
0
In Love
0
Not Sure
0
Silly
0

You may also like

Comments are closed.

More in:Blue Chips