Microsoft (NASDAQ:MSFT) is one of the most successful technology companies in the world. In fact, just recently, Business Insider observed that the software giant "briefly surpassed Apple as the most valuable US company."
Microsoft, like many mature technology companies, puts a significant chunk of its free cash flow directly in the pockets of its shareholders by way of a $0.46-per-quarter dividend (recently raised from $0.42 per share), which works out to $1.84 per share on an annual basis. That translates into a dividend yield of around 1.73% at the current share price.
Let's take a look at how safe Microsoft's dividend currently is.
What is Microsoft's payout ratio?
As this article from The Motley Fool's Knowledge Center explains, there's a metric, known as a company's payout ratio, that serves as "a way to measure the sustainability of a company's dividend payment stream."
The payout ratio is calculated by dividing the amount that a company pays out in dividends per share by its earnings per share (EPS).
In its fiscal 2018, Microsoft reported that, on a non-GAAP basis, it raked in $3.88 in EPS. This means that Microsoft's payout ratio -- using the fiscal 2018 EPS figure -- comes out to around 47.4%.
Put another way, Microsoft is putting nearly half of its fiscal 2018 profits into shareholders' pockets.
How sustainable is Microsoft's dividend?
Here's another relevant excerpt from the aforementioned article in The Motley Fool's Knowledge Center: "Many investors prefer companies with lower payout ratios because they can continue to pay their current dividends even if they see a drop in earnings. Furthermore, companies with lower payout ratios have the potential to increase their dividend payments over time."
Microsoft's payout ratio is, indeed, low enough that even if it were to see a significant drop in earnings, it'd be able to keep distributing its dividend.
Microsoft could also theoretically keep increasing its dividend even in a situation where its earnings were roughly flat for a while simply by cranking up its payout ratio.
With that all being said, though, that analysts currently estimate that Microsoft's non-GAAP earnings per share will rise to $4.44 in its fiscal 2019 and then further to $5.03 in its fiscal 2020. If these estimates are in the right ballpark, then the tech giant should be able to keep increasing its dividend without needing to resort to payout ratio increases.
The key point, though, is that Microsoft's current dividend is arguably big enough to be attractive while at the same time isn't so large that if the company were to have a tough year, it'd have to cut its dividend -- a painful and, frankly, embarrassing thing for a company to be forced to do.
Expect continued increases
Microsoft is a well-run business that has a solid track record of growing sales and, ultimately, earnings per share. The company also has a history of delivering annual dividend raises to its shareholders.
If you're a Microsoft shareholder, then I think that the odds are good that you'll continue to see steady dividend increases in the years ahead.
Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends AAPL. The Motley Fool owns shares of Microsoft and has the following options: long January 2020 $150 calls on AAPL and short January 2020 $155 calls on AAPL. The Motley Fool has a disclosure policy.