Drip Portfolio Microsoft's Dividend Plan

Microsoft not only starts to pay a dividend this year, but it also launched a dividend reinvestment plan, including a direct purchase option. Despite its plan's fees, the company may be worth buying into, month after month, for years to come. We want to think about it.

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By Jeff Fischer (TMF Jeff)
January 30, 2003

It's arguably the most successful company in the world, and it's currently the most valuable one, too. (See, there is some logic to the world.) Now, for the first time, it's offering a dividend -- which you've probably heard about -- but did you know that it's offering a dividend reinvestment plan, too?

Do you even know who "it" is? Of course you do. It's Cosmicroft. Er, Microsoft (Nasdaq: MSFT). The software giant affectionately known round the world as "evil" is sharing its wages of sin. On January 16, the company announced an annual dividend of $0.16 per share.

With its recent $49 stock price, that results in a dividend yield of 0.33%. For comparison, Intel (Nasdaq: INTC), which has been increasing its dividend for years, yields 0.50%.

Microsoft's yield isn't enough to make anyone except the most monied shareholders excited, but the new dividend reinvestment plan merits some attention.

Buying Microsoft directly
Microsoft's Direct Investment Program is run by Mellon Investor Services. It offers a direct stock purchase plan option to start, fractional share purchases at regular intervals, and dividend reinvestment.

Starting from scratch, you can enroll in the direct purchase plan by buying $1,000 worth of stock, or by agreeing to automatically purchase stock in twenty sequential purchases of at least $50.

The initial purchase fee is $10 plus $0.06 per share. For subsequent purchases, the fee is $0.06 per share plus $2 per electronic purchase, or $5 per check purchase. The dividend reinvestment fee is $0.06 per share, plus 5% up to a maximum of $3. Selling will cost you $15 plus $0.12 per share.

While those fees may look ugly, they're still significantly lower than what you would pay most brokers. Our sponsor, ShareBuilder, is one exception, offering comparable fees.

Fees and all, is the company worth purchasing?

Not a bad value
Microsoft will pay about $860 million a year in dividends. That's a small fraction of its annual free cash flow and its $43 billion in cash and equivalents. (By the way, coupled with zero long-term debt, $43 billion is enough to give Microsoft the strongest balance sheet in the world, that I can find -- if you see one better, please e-mail me.)

Free cash flow in the fiscal year ended last June totaled $13.8 billion. Excluding noncash items, it was $9.8 billion. The company has an enterprise value of $223 billion, putting it at 16 times and 22 times free cash flow, respectively, depending on which number you use. That's below or in line with the S&P 500's price-to-free cash flow multiple of 22, as of December 2002.

Microsoft is expected to grow about 11% this year, and 5% during the year ending June 2004, although there's plenty of room for upside in the 2004 estimate. The stock trades at 28 times trailing earnings and 24 times 2003 estimates.

Although this lazy look at valuation may not make Microsoft appear cheap, on a free cash flow basis, it's one of the lower-priced large caps out there, and it is, obviously, one of the most successful businesses in the world (if not the most) and it retains plenty of potential.

The company is increasing its headcount by about 10%, to 55,000 by June, and recently said it would hire 1,500 enterprise software representatives. Need a job? Apply.

Microsoft's stock is at 1998 prices, meaning a few things: It had steep valuation multiples for a few years, as only now are earnings catching up, and it may be a good time to start dollar-cost averaging into the company. There aren't any other companies with a better command of their industry, and I don't know any others that haul in $14 billion in operating cash flow in a year and invest only $770 million in capital expenditures.

Now there's enviable company economics that aren't likely to change any year soon. Microsoft is one company that could eventually make a $200 billion market value seem somewhat modest again, given time. Perhaps there's a young one in your life who would benefit by being a direct shareholder. Perhaps you would.

Jeff Fischer eats 95% of the pizza, and he'll take the last slice, every time. You'd think he owned shares of Microsoft, but he doesn't. The Fool has a "dripclosure" policy.

Drip Portfolio

  Ticker Company Price
 Change
 Daily Price
 % Change
 Price 
  MEL MELLON FINL CORP (0.64) (2.77%) 22.50 
  PEP PEPSICO, INC. (1.8) (4.44%) 38.71 
  JNJ JOHNSON & JOHNSON (0.86) (1.64%) 51.54 
  INTC INTEL CORPORATION (0.87) (5.22%) 15.79 
  PAYX PAYCHEX INC (1.03) (3.99%) 24.76 
      
  Trade Date # Shares Ticker Cost/Share Price  Total % Ret  
 10/07/98 50.5452 MEL 34.29 22.50  -33.81%
 07/28/00 15.2182 PEP 45.57 38.71  -13.18%
 11/14/97 39.403 JNJ 42.32 51.54  22.89%
 09/08/97 59.9456 INTC 25.10 15.79  -36.46%
 02/05/02 10.275 PAYX 34.06 24.76  -27.32%
      
  Trade Date # Shares Ticker Total Cost Current Value  Total Gain  
 10/07/98 50.5452 MEL 1,733.06 1,137.28  -595.79 
 07/28/00 15.2182 PEP 693.53 589.09  -104.46 
 11/14/97 39.403 JNJ 1,667.59 2,030.82  363.24 
 09/08/97 59.9456 INTC 1,504.68 946.54  -558.14 
 02/05/02 10.275 PAYX 350.02 254.41  -95.61 
Cash:983.04 
Total:5,941.18 


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Key
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Note
Drip Port launched with $500 on July 28, 1997, adds $100 to invest every month, and the goal is to own $150,000 in stock by August of the year 2017. Due to the slow nature of dollar-cost-averaging and our relatively significant starting costs, we do not expect to seriously challenge the S&P 500 for the first three to five years as we build an investment base. The long-term advantages of dollar-cost-averaging still overcome the short-term disadvantages, however. Final note: our investment in Campbell Soup is frozen due to fees instituted in its investment plan. Click here for a history of all Drip Port transactions.