Here's Why Microsoft Will Continue Paying Dividends to Investors

NEW YORK (TheStreet) -- If you are an investor in technology stocks, you know they have been gaining a lot of momentum recently.

That rising tide includes some old boats. For instance, there’s Microsoft (MSFT). The company’s new CEO, Satya Nadella, has been in the news since replacing Steve Ballmer, tasked with turning the software developer giant into a growth company once again.

Shares, at $44.50, are up 19% for the year to date.

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Microsoft has a history of making its dividend payments, as this chart shows. The company has been a very impressive cash generator and is well known for giving good returns to its shareholders.

Currently, Microsoft's dividend yield is around 2.8% and dividends have increased by 16.4% over the past five years on average.

Payout Ratio

The payout ratio of a company can determine whether or not it is actually paying dividends from profits being earned or if dividends are a false indicator of growth in the company. A payout ratio below 100 means that the company is easily paying the dividends from its earnings; a payout ratio of over 100% indicates a company is paying out dividends more than what its net income is.

To determine the sustainability of dividends, it is crucial to analyze the payout ratio. A relatively higher payout ratio indicates higher chances of the stock not being sustainable. Microsoft currently has a payout ratio  of around 38%, which indicates that the stock is highly sustainable. It is currently paying its dividends from what it is earning and its dividends actually represent growth in the company.


For a tech firm, research and development is of crucial importance. Microsoft's transition to cloud-based offerings  ensures the company is trying to remain among the leaders in the sector and that growth prospects seem favorable.

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Such situations create a sense of confidence in the company's performance and suggest that returns to shareholders will be sustained by the company since they would be a continuum of growth in the company.

Free Cash Flow

A firm's free cash flow can also be a strong indicator of the company's financial position. It reveals how much cash a company has after maintaining or expanding its asset base. In Microsoft's case, the free cash flow fell last year as the capital expenditure of the company almost doubled.

However, despite the fall, free cash flow indicated the company was still generating good amounts of cash. At the same time, this fluctuation suggests the years to come will report higher income levels owing to the investments made at present. This, therefore, suggests the company will be able to sustain the rates at which it has been growing its dividends over the past few years.

Historical Trends

Finally, a company's historical trends can help forecast its future performance as well. Since 2003, Microsoft Corporation has been paying dividends each year since 2003 and the payout per share has been increasing for the past eight years.

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These trends show dividend sustainability is not an issue for Microsoft, making it an excellent stock for your investment.

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

TheStreet Ratings team rates MICROSOFT CORP as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:

"We rate MICROSOFT CORP (MSFT) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, solid stock price performance, reasonable valuation levels and good cash flow from operations. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • MSFT's revenue growth has slightly outpaced the industry average of 11.0%. Since the same quarter one year prior, revenues rose by 15.6%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • MSFT's debt-to-equity ratio is very low at 0.25 and is currently below that of the industry average, implying that there has been very successful management of debt levels. To add to this, MSFT has a quick ratio of 2.31, which demonstrates the ability of the company to cover short-term liquidity needs.
  • Compared to its closing price of one year ago, MSFT's share price has jumped by 40.04%, exceeding the performance of the broader market during that same time frame. Regarding the stock's future course, although almost any stock can fall in a broad market decline, MSFT should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
  • Net operating cash flow has significantly increased by 61.17% to $9,514.00 million when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of 39.74%.

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