Microsoft Doubles Down

Microsoft (Nasdaq: MSFT  ) surprised many early this year by announcing its first dividend in history. If you thought that dividend was a good thing, today the company decided you can't have too much of it and doubled down, raising its yearly payout from $0.08 per share to $0.16.

The world's software company still has the most modest dividend of any on the Dow 30. Shareholders buying today will yield 0.58% in an index where the average yield tops 2%. But there isn't any reason Microsoft's dividend can't go higher, and perhaps much higher, in future years.

With 10.8 billion shares outstanding, Microsoft's dividend will cost $1.7 billion annually (although more than a little of that goes back to insiders, the largest independent owners). That's a small portion of the company's approximately $13 billion in annual free cash flow, not to mention its $49 billion in cash and equivalents, which grows by leaps in interest alone.

If Microsoft has a weakness, it's that it can't find -- and will likely never find -- a business that equals or betters its world dominating software, such that any new business venture it takes on (MSN, MSNBC, gaming consoles, keyboard sales, etc.), should it ever grow large enough, would only lower the company's stellar returns on investment.

Now, you might argue that more money is more money, period -- and you have a good point. But investors are not always logical. Whereas Wal-Mart (NYSE: WMT  ) can get away with floor-sweeping margins and everyone's happy as long as sales keep growing, Microsoft investors are accustomed to net profit margins well above 30% and have questioned ventures (like the TV network) that aren't as profitable as Windows. This leaves Microsoft with an enormous pile of growing cash and few truly exceptional ways (none better than what it's already doing) to invest it.

Oh, of all the problems to have, it's not a bad one. Paying some of the cash out to investors -- and probably a larger amount every year -- seems a great answer. At the same time, Microsoft has plenty left over to reinvest in world domination. The company recently said it would add up to 5,000 jobs (it currently employs about 55,000) in fiscal 2004 and increase spending by $6.9 billion.

Microsoft's shares are the least expensive among the 20 most widely held stocks in the country. At $27, the company has an enterprise value to free cash flow of about 17; it trades at a forward P/E estimate of 23. There have been much worse times to buy the stock, and there may not have been a better time (valuation-wise) since about 1998.

The Fool's Tom Jacobs recently explainedwhy he bought Microsoft. But if it's truly healthy dividends you seek, with yields large enough to put you in caviar and smoked salmon, consider a free trial ofMotley Fool's Income Investor.

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