When it comes to dividend investing, Microsoft Corporation (NASDAQ:MSFT) stock usually isn’t at the top of investors’ lists. Actually, tech stocks in general aren’t usually a sector for dividend investors to mine since companies tend to plow their earnings back into the business to grow. However, old dog MSFT stock is so big now that it can grow at a decent pace and reward shareholders with a hefty dividend at the same time.
MSFT stock has been flat since the start of the year, but it offers an attractive dividend yield of 2.82%. Microsoft stock could be a compelling choice for any income investor’s portfolio. Here are three reasons why Microsoft is a top dividend stock.
A company still needs to grow if it’s going to reward shareholders with some of its free cash flow. Fortunately, Microsoft is still growing at a steady clip. Revenue grew almost eight percent for fiscal year 2015. Not bad for a company that is 41 years old (which is ancient in the tech world).
The company has numerous growth initiatives that should, at the very least, keep up with that growth pace. Microsoft’s cloud computing efforts are proving to be a boon for the company.
Since CEO Satya Nadella took the helm of Microsoft two years ago, he has rapidly taken the company’s core technologies and shifted them to the cloud. Microsoft’s “Office 365” has a customer base of 20.6 million users, up 124% over last year.
Nadella has also opened up Microsoft cloud services to other devices other than a “Windows” phone, such as Apple Inc.’s (NASDAQ:AAPL) “iPhone” or phones powered by Alphabet Inc’s “Android” operating system (OS), which will go a long way to increasing its market base.
Lastly, growth in “Azure,” the infrastructure behind Microsoft’s cloud platform, is booming.
In its latest quarter, Microsoft reported that Azure revenue rose 140% annually over last year. Forrester Research estimated that Azure had an annual run rate of $1.6 billion, which would put it second behind Amazon.com, Inc.’s (NASDAQ:AMZN) “Amazon Web Services” (AWS). (Source: “How Microsoft business enterprise’s Cloud business Is Doing In 4 Numbers,” CrmSoftwareWorld.com, February 3, 2016.)
Altogether, Microsoft’s cloud-based services (Office 365, Azure, “CRM Online,” and others) reached an annualized revenue rate of $9.4 billon. Microsoft management expects that number to double to $20.0 billion by 2018.
Investors won’t need to worry anytime soon about free cash flow drying.
Microsoft has been paying out a dividend to investors since 2003, increasing it every year for the last six years. Microsoft’s dividend growth is also impressive. Over the past decade, Microsoft’s dividend growth rate has been 14.7% per year; during the last five years, that growth rate was 18.9% per year, growing from $0.16 per share to $0.36 per share.
It will be hard for Microsoft to keep up that growth pace in dividends, but rest assured, MSFT stock has more than enough cash on hand to dish out the dividends. Microsoft has more than $100 billion in cash and short-term investments on hand, according to its balance sheet in its latest earnings report. So, Microsoft should be able to increase them every year for the next few years at least.
In 2013, Microsoft announced a massive $40.0-billion share buyback program. In the latest quarter alone, Microsoft returned $6.5 billion to shareholders in the form of share repurchases and dividends. Microsoft’s share buybacks will have a positive effect on earnings per share as it gobbles up its own stock float, reducing its supply.
The Bottom Line on MSFT Stock
With lots of growth still ahead, solid dividend growth, and management buying back shares, income investors may want to take a closer look at MSFT stock.