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Last update on 2024-06-25

Microsoft (MSFT) - Dividend Analysis (Final Score: 6/8)

In-depth dividend analysis of Microsoft (MSFT) using an 8-criteria scoring system. Discover the performance and stability of Microsoft's dividend policy.

Knowledge hint:
The dividend analysis assesses the performance and stability of Microsoft (MSFT) dividend policy using a 8-criteria scoring system.
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Short Analysis - Dividend Score: 6

We're running Microsoft (MSFT) against the 8-criteria scoring system to evaluate the performance and stability of a company's dividend policy.

Criteria
Dividend Yield Higher than the Industry Average?
1
Average annual Growth Rate higher than 5% in the last 20 years?
1
Average annual Payout Ratio lower than 65% in the last 20 years?
1
Dividends Well Covered by Earnings?
1
Dividends Well Covered by Cash Flow?
1
Stable Dividends Since the Company Began Paying Dividends?
0
Dividends Paid for Over 25 Years?
0
Reliable Stock Repurchases Over the Past 20 Years?
1

Microsoft (MSFT) scored 6 out of 8 criteria assessing their dividend policy. Their dividend yield is above the industry average but has shown a decline due to rising stock prices. The dividend growth rate over the past 20 years is impressive at 64.7%, indicating strong commitment to increasing dividends. The average payout ratio is 58.10%, reflecting a good balance between rewarding shareholders and retaining earnings. Dividend cover ratio is often below 1.5, raising concerns about sustainability if earnings decrease. However, dividends are generally well-covered by free cash flow. Microsoft has paid dividends consistently since 2003 and has a reliable stock repurchase program over the past 20 years.

Insights for Value Investors Seeking Stable Income

Given Microsoft's strong dividend growth rate, balanced payout ratio, and consistent dividend payments since 2003, it shows a commitment to shareholder returns. The solid stock repurchase program is also a positive sign. However, consider the recent lower dividend cover ratio which could indicate potential sustainability issues if earnings drop. Overall, Microsoft looks like a strong candidate for investors interested in dividend income but should be monitored closely for any changes in earnings and cover ratios.

For those who are interested in delving deeper into the specifics, the subsequent section provides a comprehensive exploration of the criteria.

Dividend Yield Higher than the Industry Average?

Criterion 1 examines the dividend yield, which is the annual dividend payment to shareholders divided by the stock price. A higher yield indicates more income for shareholders and is often attractive to income-focused investors.

Historical Dividend Yield of Microsoft (MSFT) in comparison to the industry average

Microsoft's current dividend yield stands at 0.7419%, which is higher than the industry's average of 0.4%. Over the last 20 years, Microsoft's dividend yield has fluctuated, peaking in 2004 at 11.8263% and remaining above 1% in many years. Since 2019, there has been a consistent, albeit slight, decline in yield. This is due, in part, to Microsoft's significant share price appreciation—from $157.7 in 2019 to $376.04 in 2023—despite steadily increasing dividends per share. While the higher-than-average yield is good, attention to the declining trend coupled with rising stock prices suggests the company may be focusing on capital growth. This could be appealing or concerning based on investor goals.

Average annual Growth Rate higher than 5% in the last 20 years?

Analyzing the dividend growth rate over a long period, such as 20 years, provides insights into the company's commitment to returning capital to shareholders consistently. A growth rate higher than 5% is typically considered a healthy sign of financial stability.

Dividend Growth Rate of Microsoft (MSFT)

Based on the provided data, Microsoft's dividend per share ratio has fluctuated significantly over the last 20 years. While specific annual percentages vary, an average growth rate of 64.7% is exceptionally high. This indicates a generally strong commitment to increasing dividends, despite some occasional declines. Notably, years like 2004 show extremely high growth rates, possibly due to special dividend payments or significant corporate restructuring. Overall, this trend is favorable, signaling financial health and a shareholder-friendly approach. However, current and prospective investors should in-depth analyze the causes behind extreme annual changes for a clearer picture.

Average annual Payout Ratio lower than 65% in the last 20 years?

Analyze the importance of the Average Payout Ratio in the context of Microsoft's dividend policy, providing an explanation of what the payout ratio signifies.

Dividends Payout Ratio of Microsoft (MSFT)

The historical data reveals Microsoft's payout ratio over the last 20 years, where it has ranged significantly with peaks and troughs. Notable high figures include over 421% in 2004 and over 80% in 2018, whereas other years like 2003 had much more conservative ratios around 26%. The average payout ratio over these years stands at 58.10%, which is comfortably below the crucial 65% threshold. This steadiness reflects a healthy balance between rewarding shareholders and retaining earnings for growth and innovation, making this trend favorable for continued dividend reliability.

Dividends Well Covered by Earnings?

Dividends are well covered by the earnings. This criterion assesses whether the company's earnings are sufficient to pay out the dividends. The Dividend Cover Ratio, calculated as Earnings per Share (EPS) divided by Dividend per Share, helps in determining this aspect. A higher ratio indicates that the company is more likely to sustain or increase dividend payments without compromising its financial stability.

Historical coverage of Dividends by Earnings of Microsoft (MSFT)

Analyzing Microsoft's data from 2003 to 2023, the Dividend Cover Ratio ranges from as low as 0.246 in 2008 to a peak of 4.214 in 2004. Generally, a ratio above 1.5 is considered healthy, suggesting that the company is earning significantly more than it pays out in dividends. Most years show a ratio below the optimal level, especially in recent years where it trends under 0.4. This is concerning from a dividend sustainability perspective, as it suggests that the company is paying out a significant portion of its earnings as dividends. Nevertheless, the low payout might be strategic, aiming for balanced growth and income distribution, but it still raises red flags for sustainability if earnings dwindle.

Dividends Well Covered by Cash Flow?

This criterion examines whether the company's dividends are sustainable by comparing the free cash flow to the dividend payout amount. A higher ratio indicates better coverage, which is crucial for long-term dividend reliability.

Historical coverage of Dividends by Cashflow of Microsoft (MSFT)

Microsoft (MSFT) shows a positive trend in covering its dividends with free cash flow over the years. In 2003, the coverage was only 0.057, which is quite low. However, this ratio improved significantly, reaching as high as 0.44 in 2016. Although there was a slight decline to 0.278 in 2022, the ratio improved again to 0.333 in 2023. This upward trend indicates that the company's free cash flow is increasingly capable of covering its dividend payouts, suggesting a sustainable and potentially increasing dividend policy. This trend is generally positive for investors seeking reliable dividend income, as it signifies a strong financial position where cash flow more consistently supports dividend payments.

Stable Dividends Since the Company Began Paying Dividends?

Explain the criterion for Microsoft (MSFT) and why it is important to consider

Historical Dividends per Share of Microsoft (MSFT)

Stability in dividend payments, where the dividend per share did not drop by more than 20% over the past two decades, is of utmost importance for income-seeking investors.

Dividends Paid for Over 25 Years?

Determine if Microsoft has consistently paid dividends for a span exceeding 25 years and discuss the relevance of this fact in dividend analysis.

Historical Dividends per Share of Microsoft (MSFT)

Examining the data from 1998 to 2023, Microsoft’s dividend journey commenced in 2003 with a modest dividend per share of $0.24. Subsequently, the company has consistently paid dividends for over 20 years. Although this does not satisfy the 25-year mark, the trend is encouraging given Microsoft’s progressive dividend growth over the years. Commencing with substantial inputs like $3.16 in 2004 and maintaining consistent increments, Microsoft demonstrates robust financial health. While the 25-year criterion isn’t fully met, the steady rise in dividends underscores the company’s commitment to return value to shareholders. This trend is generally positive as it reflects financial resilience and shareholder-oriented strategies.

Reliable Stock Repurchases Over the Past 20 Years?

Analyze and elaborate on the significance of reliable stock repurchases for Microsoft (MSFT) over the past 20 years.

Historical Number of Shares of Microsoft (MSFT)

Microsoft (MSFT) has demonstrated a strong and consistent share repurchase program over the past 20 years. The number of shares outstanding decreased from 10.88 billion in 2003 to 7.45 billion in 2023. Notably, there have been 17 years of continual repurchase activities. This relentless share reduction indicates a robust capital return strategy from the company, with an average annual decline of around 1.86%. This trend generally signifies good shareholder value as it suggests the company is confident in its financial health, reinforces EPS by limiting the number of shares, and underlines management’s commitment to return surplus cash to shareholders.


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