The stock's 2.5% yield is set to grow along with the technology giant's decision announced last week to buy back stock worth $40 billion, up to 9% of its outstanding shares. At the same time, it will boost its dividend payment by 8.3% to 39 cents a share.
Investors who are already impressed with the 30%-plus growth in the stock value in the past 12 months, should set their benchmarks higher. This stock is an enticing growth-and-income play.
Why is Microsoft spending tons of money this way?
For starters, Microsoft is a huge company with a market value of nearly $448 billion.
So $40 billion might sound like a large number, but it is less than a tenth of the company.
In addition, Microsoft acquired LinkedIn for $26 billion this year, and that asset should start paying off soon.
Microsoft is a comprehensive bouquet of products, including Office 365, Windows, Surface devices, cloud products that compete with Amazon's Amazon Web Services and Xbox consoles.
Second, the company is sitting on $113 in cash, according to Yahoo! Finance.
In 2012, Microsoft had total cash of $63 billion. By 2014, this had swelled to $85 billion.
This is a feat, considering that operating margins shrank from 29%-plus to less than 24% now. The answer lies in annual free cash flow, which has been around $23 billion to $26 billion for the past three to four years.
There have already been calls for Microsoft to use its cash in a better way. Truth be told, this cash earns a small yield.
So, it is a great idea to reward shareholders who want to exit the stock or reduce the share count, which can lead to earnings-per-share growth and improved return on assets and return on equity. Most importantly, by announcing its intention to buy $40 billion in stock, Microsoft is telling shareholders that it sees value in its shares.
This stock is among the best wealth generators available.
Microsoft investors can now look forward to more years of rising dividends. With the dividend payout ratio at less than 50%, Microsoft can afford to dole out much more.
Between fiscal 2007 and fiscal 2016, annual dividends, grew at a compound annual growth rate of 15.17%. The dividend growth rate looks likely to improve as the number of shares fall thanks to the buyback.
The actual amounts spent have been lower than targeted.
By leveraging its cash to buy back shares, Microsoft has escaped a fate similar to Apple whose cash pile of more than $200 billion has caused problems.
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For Microsoft investors, the $40 billion buyback will also act as a platform for share value. Moreover, even the dividends will become heftier.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.