Microsoft Hikes Dividend 23%, but Stock Remains Unfairly Unloved
Microsoft just raised its quarterly dividend by 23 percent, to 16 cents from 13 cents, but investors weren't thrilled, and they didn't even shrug off the news. They were so displeased by Microsoft's gesture that they sent the stock (MSFT) plunging more than 2 percent Wednesday, a far worse showing than the Nasdaq Composite Index, which Microsoft has been underperforming all year by a wide margin.
Some attributed the decline to disappointment that the dividend hike wasn't greater, which seems a bit churlish for a 23 percent increase that puts the yield at 2.6 percent. That's about what the 10-year Treasury bond yields.
The thumbs-down from Wall Street certainly doesn't reflect concern that Microsoft can't come up with the extra money. Microsoft has about $37 billion of cash on its books, worth more than $4 a share, and in the same announcement about the dividend, the company said its board had authorized taking on an additional $6 billion of debt, which it no doubt can obtain at very low rates.
The negative reaction isn't just a matter of dollars and cents. For some investors the dividend increase confirms their suspicion that Microsoft has run out of ideas. They would have preferred that Microsoft spend some of its cash hoard buying a company in a hotter, cooler business.
While they may have decided that Microsoft is yesterday's company, it still makes plenty of money today, however. Based on measures such as operating margin, return on assets and return on equity, its success is staggering thanks to the continued extraordinary cash generation of its Windows and Office software. Microsoft is better than Apple (AAPL) and Google (GOOG) on all three criteria.
"Microsoft has always ranked at the top of our list in the qualities we're looking for - very broad diversification; near-high levels of profitability for its industry; attractive but not too attractive growth prospects; larger capitalization," Mowrey said.
What about the dividend increase? "For a company that throws off as much cash as Microsoft, it's good to see them giving some of it back to shareholders. It's hard for me to understand how an increase in the dividend for a company that's already paying one can be a bad thing." He noted that Cisco Systems recently said it was thinking of introducing a dividend and the stock (CSCO) reacted positively.
Mowrey rebutted the idea that the dividend increase is a sign that Microsoft has lost its creative mojo: "It's a meaningful increase, but this company is still very much investing in growth. There have been some missteps, but they're trying all these new things."
The game business, in particular, is a source of innovation and healthier financial performance, he said. (Have a look at the trailer for the recently released Halo Reach.)
What it comes down to for Mowrey is that while Microsoft is a winner in commercial and financial terms, it keeps losing the popularity contest on Wall Street. "Nobody likes Microsoft," he lamented.
His regard for Microsoft hasn't paid off lately, but he's sticking with the stock. And although he does own some growth stocks - including Apple, which he rates a hold but not a buy at its current price - he is also sticking with his value approach.
"Eventually value gets out and the investment is proven correct," he said. "You're going to pay up for growth, and more often than not, it seems, you're going to be disappointed. I'd much rather place my bet on a company like Microsoft with a stable of strong, long-term-attractive businesses, and they're paying me to be patient by offering a moderately attractive dividend. The entire package still seems attractive to me."
