Thursday, August 11, 2011

The Bank of Microsoft

Between now and the end of September,Microsoft (MSFT - commentary - Trade Now) will decide whether it is going to raise its dividend. I have a long position in Microsoft because I am hopeful that the company will consider drastically raising its regular dividend this year.

Over the past few years, Microsoft has chosen to take some of the money out of its operating cash flow and buy some stock back, pay out a dividend (with a marginal increase each year) and keep the rest to run the business.

But consider what has happened in the world in the last year (or even in just the last few weeks). Today, Microsoft and four other corporates have a better credit rating than the United States government.

In the past couple of weeks, as the world trembled in fear over a renewed and more powerful economic recession, people sought shelter in U.S. Treasuries. They were willing to accept a 2.38% yield on a 10-year note, rather than a forward dividend yield of 2.50% from Microsoft (with the chance of upside appreciation in the stock).

The world is a scarier place today than it was a year ago. When the CBOE Volatility Index (VIX) goes from 17 to 45 in a few short trading days, you know that these are volatile times.

Widows, orphans, and pension funds can't park money in Standard Oil or one of the big banks anymore. When Bank of America (BAC) can drop 20% in a day, how can "safe" investors hold that stock?

Microsoft is the new safe bank of the 1930s for investors to park money in. The company is not growing as it did in the 1980s, but it is throwing off an incredible amount of cash that is in no danger. Plus, it still is showing it has the chops to deliver some growth in Kinect, XBox and Cloud.

I believe that if Microsoft can be encouraged to more than double its current amount allocated to regular dividends -- say spending half (or $13 billion) of its operating cash flow -- it would attract a significant number of investors into the fold.

There would be a rapid one-time increase in the stock price as investors flooded to hold the stock with the new higher yield. However, I believe there would also be a gradual increase in the stock price over time as more investors found the investment so much more compelling than U.S. Treasuries.

Who would you trust to deliver you a great yield going forward in these uncertain times? Microsoft or the government?

From RealMoney.com

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