Should Microsoft Pay Out A Payout Ratio?

By: ispeculatornew
Date posted: 09.29.2011 (5:00 am) | Write a Comment  (0 Comments)

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Microsoft (MSFT) and Intel Corp (INTC) are probably the two most important dividend stocks in the Tech space which conveniently is a space that I have deep interest in. These two names also turn out to be great dividend payers and would probably both qualify as solid sustainable dividend stocks. In fact, Microsoft is part of our Ultimate Sustainable Dividend portfolio. They are both using the standard (usual) method in determining how much they pay to stockholders for each payment. They pay an amount for a few quarters and try to raise that amount every once in a while (each year is the rule of thumb). That is great and there is no doubt that it has worked well for both companies so far. I would argue that it is maybe not the best way to go from a dividend shareholder perspective.

What Would Be The Alternative?

What if Microsoft took a different approach. Instead of paying out a set amount, it could opt to pay a fix percentage of the diluted earnings per share. I would not consider this if they needed to reinvest very large amounts of cash but that is clearly not the case. Microsoft is piling up cash at a faster rate than almost everyone else (Apple is clearly part of that exception!). Could Microsoft do it? There would be benefits and downsides but I think it would be a great thing overall. Let’s start by looking at a few numbers. Microsoft dividends since 2006, diluted earnings per share and then the dividends that would occur if Microsoft had decided to pay out 25%, 35% or even 50% of those earnings.

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Impact

To be clear, there would of course be different impacts on the company and it’s difficult to estimate what the value would be. For example, it’s very difficult to estimate what the dividend yield would be. Why? Because in the scenario where the company had paid out 50% of its earnings, Microsoft would have $20 billion less in its cash reserves. Instead, that cash would be in the hand of its shareholders. Lets take a look at the pros and cons:

Cons

Instability: There is no doubt that one of the most important aspects of passive income investing is holding stocks that can increase their dividends and be reliable. A company that would be paying a fix ratio would certainly have some ups and downs. For example, Microsoft dividends would be impacted by launches of Windows or Office (spikes when they do and small declines after that).

Less cash for the company: There is certainly value in having Microsoft being able to hold so much cash. Last week, we discussed some of the possible acquisitions that Microsoft could/should look at. In a world where Microsoft’s main competitors (Google, Apple and others) hold tons of cash, it is certainly possible that such a strategy would make acquisitions more difficult.

Pros

Major incentives for the company: I tend to think that like releasing earnings per share, this would give increased incentives for the company to manage its cash even better.

Maximize Dividend Payouts: I don’t think anyone doubts that Microsoft could easily pay out more of its earnings to shareholders. It doesn’t too that for many reasons. One of them is that by raising its payout, it needs to be able to pay that additional amount every quarter in the long term. That makes raising the dividend that much more difficult.

Disclosure: No Positions on MSFT or INTC

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