Thursday, September 08, 2011

Memo to Microsoft: Raise the Dividend


Every September, Microsoft (MSFT) has a board meeting during which its members discuss capital structure, share buybacks and the stock's dividend. Typically, this takes place in the third week of September and the company makes an announcement within a few days of the meeting, discussing the outcome and their plans.
For the past few years, the announcements have included modest increases in the regular dividend. While appreciated, those moves haven't done much to light a fire under the stock price.
Since announcing its big one-time dividend payout several years ago, Microsoft has been reluctant to do anything unusual with its payout. The company simply increases the payout of its ever-growing cash flow. At the moment, the forward yield on the dividend is 2.50%.
The company also has a stock repurchase plan in place that management is working down before it expires. Again, nothing noteworthy.
The only unusual move Microsoft has made in recent years has been to tap the debt markets against its massive offshore cash holdings. Management has taken advantage of favorable rates that they can get with their AAA credit-worthiness. However, they have yet to use this extra cash to do anything.
What's changed now is the ever-increasing volatility in the markets. U.S. Treasuries have been recently bid to lower yields than they were at the 2008 Lehman Brothers crisis aftermath. Investors -- not just widows and orphans, but large pension and asset managers -- crave security these days.
Most pensions need to deliver 7% returns annually or they will start facing severe shortfalls. If they were able to buy Microsoft and be assured of a large payout each year (not including any stock appreciation), they would find that highly attractive -- certainly more attractive than buying 10-year U.S. Treasuries at 2%.
For that reason, I think Microsoft is more likely than not to do something dramatic. It has been something I've been lobbying with them for well over a year and other shareholders have beaten the drum, too. I think the board is likely to see higher dividend could make the stock much more attractive.
If the board does approve a big hike, expect Microsoft's shares to rally in mid-September to early-October.
At the time of publication, Jackson was long MSFT.

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