Microsoft Corporation (NASDAQ:MSFT) announced an increase in its quarterly dividend, which is now up from $0.20 to $0.23 per share, payable from December of this year. The annualized return is $0.92. The 15 percent increase now brings the annual dividend yield to 3 percent.
The expected annualized yield was somewhere in the range of $0.86-0.89, as mentioned in a report by Morgan Stanley (NYSE:MS). The investment banker has rated the stock at Overweight, and comments that with the present handsome yield, little multiple risk, and expected tailwind from Windows 8 release, the stock is expected to perform well.
Morgan Stanley (NYSE:MS) estimates that the increase in dividend is also derived from the growth in trailing operating income. The dividend raise is a multiple of trailing operating income growth at >5x of the 2012 operating income growth, whereas the dividends rose by only 1.4-1.9x in the past two years.
Although the increased dividend beats expectations, it is still less than $0.04/ quarter (or 25 cents), but MS finds that one can overlook this contraction as the annual dividend payout rises to 30 percent for FY2013, as opposed to a 29 percent payout in FY12. The annualized return in dividend also beats average of 26 percent over the past five years.
On the basis of Operating cash flow (OCF) and Free cash flow (FCF), a dividend of 92 cents/share, which will be paid in FY2013, represents spending $7.6 billion, which is less than the 25 percent of MSFT's $31 billion spent in OCF and 27 percent of FCF for FY2013.
As Microsoft's market is more expansive outside of the US than within the US, whatever revenue is generated offshore will be subject to tax penalty. Morgan Stanley estimates that more than 60 percent of FCF comes from offshore business, of this only 40 percent is available for capital return after taxes. This leaves $11.2 billion out of the $63 billion of Microsoft Corporation (NASDAQ:MSFT)'s onshore cash, that can be used for share buybacks, dividends, and/or domestic acquisitions for FY2013, or after payment of the $7.6 billion in dividends, only $3.6 billion/year for other operations.
MS models about $7 billion spent in buyback of shares for 2013, which is an increase of $2 billion from 2012, but is lower than $11 billion spent on similar operations in 2o10 and 2011. There is also reduced chances of any big acquisition owing to the higher annualized dividend. MS thinks that their FCF/US FCF estimations could be too low.