Expect Years of Continued Dividend Growth
Thanks to its excellent fundamental strength, Microsoft can return a great deal of cash to shareholders.
In fact, the company returned more than $24 billion to shareholders last fiscal year in combined dividends and share repurchases.
It has aggressively grown its dividend in recent years. Microsoft has raised its dividend by 17% compounded annually over the past five years. With such strong dividend growth, an investor can expect their dividends to double every four years.
Going forward, there is every reason to expect Microsoft’s high dividend growth rates to continue. The company’s dividend payout ratio as a percentage of free cash flow was 42%; the fact that the company is still distributing less than half of its free cash flow is a great sign for future dividend growth. Another great sign is that Microsoft holds a pristine balance sheet.
Microsoft is one of only two U.S. based companies to hold the coveted ‘AAA’ credit rating from Standard & Poor’s. The company has $116 billion in combined cash, short-term investments, and long-term marketable securities on its balance sheet. It has a 2.8 current ratio, implying excellent short-term liquidity. Long-term, debt is not a concern for shareholders. Microsoft maintains a healthy 54% long-term debt to equity ratio.
Final Thoughts on Microsoft & The Technology Sector
Thanks to Microsoft’s excellent growth rates in its newer cloud-based businesses, as well as continued success in Microsoft’s hardware and other businesses, it has more than enough financial flexibility to raise its dividend at high rates. There are simply very few stocks that can match Microsoft’s unique blend of a high current yield as well as high dividend growth.
The company is exhibiting an ability to adapt with changes in the technology industry. International Business Machines Corp. (NYSE:IBM) is one of the only examples of a technology company that has been able to grow for very long periods of time (IBM was founded in 1911).
Microsoft could be another technology industry stalwart that is able to fight against rapid change in the industry and generate rising dividend income over time. Microsoft’s wide diversification within the technology industry combined with its cash hoard and tremendous free cash flow creation make Microsoft one of the most likely companies in the technology sector to generate rising dividend income over time.
Whether you are a retiree looking for income now, or a dividend growth investor with a long time horizon, Microsoft makes a compelling investment if you are looking for an investment in the technology sector.
With that said, Microsoft (or any other technology firm) does not have the same level of long-term safety as the best businesses in the consumer staples sector. This is because the technology industry changes so much faster. We will always eat food and drink beverages. Thirty years from now, who can really say what the future of the technology industry will be.
A long-term investment in Microsoft Corporation (NASDAQ:MSFT) is an investment in the belief the company will be able to adapt to the ever-changing technology landscape. Microsoft’s excellent balance sheet, huge amounts of free cash flow, and diversification make the company one of the best dividend investments in the technology industry.
Disclosure: This article is originally published on Sure Dividend by Bob Ciura.
