How a dividend-buyout combo could boost Microsoft’s stock


As its reach in the cloud grows, Microsoft (NASDAQ: MSFT) makes sure shareholders get their share. The company is using its abundant cash flow to repurchase shares and increase its dividend, to the tune of $ 43.9 billion in the past 12 months, with no signs of stopping on both fronts. Each strategy on its own could make investors richer, but together they appear to boost the company’s total returns.

Microsoft Redemption Yield Estimate

Mid-September tends to mark Microsoft’s annual rise in dividends – typically one nickel per quarter, per share, in recent years. With that quarterly dividend currently at $ 0.56, a boost like those in the past would push payments to $ 0.61, or $ 2.44 per year, for a return of about 0.8% at recent prices.

Meanwhile, the company is nearing the end of its latest share buyback program. Of the $ 40 billion he started with in February 2020, he was down to $ 8.7 billion as of June 30, having bought back $ 6.2 billion worth of shares in that fourth quarter. . If it keeps this spending pace, Microsoft could almost use up the rest of its buyout balance by the end of September.

Image source: Getty Images.

Last year, Microsoft spent 49% of its free cash flow to buy back stocks. If it preserves that percentage with the estimated $ 67 billion in free cash flow for the coming year, it will spend at least $ 32.7 billion on buybacks, an increase of more than 19 percent from the previous year. year which has just ended.

Add that $ 32.7 billion to the $ 18.3 billion or more Microsoft could spend on dividends in its 2022 fiscal year, and the $ 51 billion in shareholder gifts is a total return of 2.26% on the company’s $ 2.26 trillion market capitalization.

This assumes, of course, that Microsoft’s buyouts are actually helping shareholders – a theory the company’s performance over the past decade seems to support.

How Microsoft’s buyouts helped shareholders

The increase in Microsoft share buybacks over the past decade has dramatically reduced the number of its shares:

A bar graph shows the steady increase in annual Microsoft share buyback amounts.

Source: Mark R. Hake, CFA, extracted from company data and statements.

Over the past 10 years, Microsoft has reduced its number of shares by 10.3%. And with fewer shares outstanding, the amount of dividends per share, or DPS, that Microsoft has paid over the past 10 years has grown faster than the total amount the company is spending to fund those dividends.

A line graph shows that Microsoft's dividend payouts per share have grown faster than its total dividend spending.

Source: Mark R. Hake, CFA, extracted from company data and statements.

This chart shows that the cumulative dividend per share increased 259%, from $ 0.61 in fiscal 2011 to $ 2.19 in fiscal 2021. But the cost of those dividends paid by Microsoft rose only 218.9%, from $ 5.18 billion to $ 16.52 billion. Thanks to redemptions, DPS increased 18.3% faster.

How Microsoft’s Free Cash Flow Makes This Possible

Due to its high margin subscription software and the company’s dominant market share, Microsoft is one of the very few companies to show consistent growth in free cash flow – up 91% from 2012 at the end of June 2021, for an average annual compound growth rate of 6.3%.

Since dividends per share grow faster than free cash flow, we know that Microsoft is using an increasing portion of that free cash flow to buy back stocks. For fiscal 2022, this double blow in dividends and redemptions should represent a gain of 16% of total payments to shareholders.

What investors should do

Microsoft shareholders have every reason to keep their shares, as management is genuinely acting in their best interests. Keep an eye on the level at which Microsoft decides to increase its dividend per share – an amount below $ 0.05 could be a bad sign, indicating that Microsoft intends to slow the growth of its dividend per share. On the flip side, if the company decides to relaunch its $ 40 billion share buyback program, or even increase it, investors could see higher dividend per share growth in the future.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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