Microsoft MSFT recently rewarded investors by enhancing shareholder returns at a time when most companies are suspending dividends and share repurchases due to the hardships posed by the coronavirus outbreak.
The company will now pay out a quarterly dividend of 56 cents per share, suggesting a 9.8% rise from the prior rate of 51 cents. The increased dividend will be paid out on Dec 10 to shareholders of record as of Nov 19, 2020.
Notably, on an annualized basis, the dividend has been increased by 20 cents to $2.24 per share, compared with the prior figure of $2.04. The company has a five-year annualized dividend growth rate of 9.5%, reflecting dividend increases for five consecutive years.
Based on its share price of $208.78 on Sep 15, Microsoft currently has a dividend yield of 0.98%. Moreover, the company’s current dividend payout ratio is 35.4%.
Dividend payouts are enticing to investors and Microsoft is committed to boosting shareholders’ wealth. In fiscal 2020, the company paid out $15.49 billion of dividends to shareholders and repurchased shares worth $19.69 billion.
The latest hike also reflects Microsoft’s solid cash position that is utilized to return value to shareholders (through higher dividends and regular buybacks) and reinvest in the business.
In fiscal 2020, the company recorded a free cash flow of over $45 billion, and over $60 billion in operating cash flow driven by improving margins and strength in operating leverage across its businesses.
In the fiscal fourth quarter, the company returned $8.9 billion to shareholders in the form of share repurchases and dividends. Also, the company reported operating cash flow of $18.7 billion in fourth-quarter fiscal 2020, compared with $17.5 billion in the fiscal third quarter.
Free cash flow came in at $13.9 billion, compared with $13.7 billion in the fiscal third quarter. The increasing cash flow trend reflects that the company is making investments in the right direction, which is expected to help it sustain the increased dividend payment.
Stock Outperforms Industry YTD
We note that shares of the company have advanced 32.4% on a year-to-date basis compared with the industry’s growth of 31.1%.
The stock has also comfortably outperformed the Computer & Technology sector and the S&P 500 index, which have gained 23.2% and 5.1%, respectively, on a year-to-date basis.
Microsoft, with a long-term earnings growth rate of 13.7%, is likely to sustain the outperformance in the near term on Azure’s expanding clientele and robust uptick in Teams user base triggered by coronavirus crisis led work-from-home wave.
Azure & Teams Adoption, Momentum in Gaming: Key Catalysts
Microsoft is benefiting from momentum in Azure. Further, Azure’s increased availability in 58 regions globally is expected to strengthen Microsoft competitive position in the cloud computing market, which is currently dominated by Amazon’s AMZN Amazon Web Services (AWS).
Per a Canalys report, for second-quarter 2020, Microsoft’s market share in the cloud services space increased to 20% from 18% in the prior-year quarter. AWS market share remained unchanged at 31% for second-quarter 2020 on a year-over-year basis.
Also, impressive Teams user growth triggered by coronavirus crisis led work-from-home, online learning wave and tele healthcare trends is a key catalyst. The tech giant has introduced Together mode feature to Teams in a bid to make video meetings lively and dynamic, and enhance user experience.
Robust updates to Teams is enabling the company to gain subscribers, which is expected to help it to strengthen its position in the video conferencing market against the likes of Zoom Video Communications ZM, Slack and Cisco’s CSCO Webex.
Further, the company is constantly integrating Azure’s cloud capabilities into its gaming segment. This is expected to facilitate it in improving gaming strategies and developing better content. In fact, Gaming revenues increased 66% at cc in fiscal fourth quarter, driven by increased engagement led by shelter-in-place guidelines and stay-at-home wave.
Solid growth in Xbox Game Pass subscriber base, third-party transactions and Minecraft augurs well. Notably, Minecraft recorded a new high of nearly 132 million monthly active users during the fiscal fourth quarter.
Microsoft’s impressive fundamentals and strengthening presence in the cloud computing market, and solid Teams adoption make it a favored stock. It further draws investor attention through its regular dividend payouts and commitment to enhance shareholder returns.
However, macroeconomic weakness in job market and lower spend on advertising due to coronavirus pandemic are likely to weigh on LinkedIn and Search revenues. Also, delays in consulting business are anticipated to limit growth.
Microsoft currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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