Dividends are rare in the tech world, and rarer still are head-turning payout raises. Microsoft (MSFT 1.66%) is a happy exception. The software giant in late September announced that it will soon start paying shareholders $0.68 per share each quarter for holding its stock. That translates into a $0.06, or 10%, raise.
Admittedly, the hike doesn't make Microsoft an especially attractive income investment. Shares are still yielding near 1% right now. But it does highlight some good reasons to like Microsoft stock today.
Let's dive right in.
Microsoft is still growing
Microsoft's most recent earnings report contained many of the warning signs that have unnerved investors during the current bear market. Sales growth slowed overall in the fiscal fourth quarter and actually turned negative in the video gaming segment. The software giant's cloud service segment seemed to show that enterprises are becoming more frugal in their IT budgets even as consumers shift spending away from PC productivity software.
Yet this is still clearly a growth business. Microsoft posted over 20% year-over-year growth in a half-dozen categories ranging from cloud services to search advertising. Overall sales jumped 16% after accounting for currency exchange swings, on top of the prior year's 21% surge. It's no surprise that management would be feeling confident about boosting the dividend in the context of that type of growth.
Cash and profits are still there for Microsoft
Microsoft is also one of the most cash-rich businesses an investor can find today. It generated over $20 billion of operating income in just the last quarter and is sitting on more than $100 billion of cash as of late June. Operating cash flow over the last year was $89 billion compared to $77 billion a year earlier.
MSFT Cash from Operations (TTM) data by YCharts
Success like that helps explain how Microsoft can easily absorb even a leading player in the video game industry. The company is funding its $69 billion purchase of Activision Blizzard (ATVI) with cash, and it still plans to invest aggressively in its other growth initiatives that target the multiyear shift toward digital work and play.
"We see real opportunity to help every customer in every industry use digital technology to overcome today's challenges," CEO Satya Nadella said in a late July press release.
More raises to come
Even with the stock price slump in 2022, Microsoft is not priced like a value stock. You can own shares for about nine times sales right now, which is a big discount compared to the P/S ratio of 14 that investors paid in late 2021. But you can own a sturdy dividend giant like Coca-Cola for six times sales, and its 3% dividend yield is well above Microsoft's 1% rate.
Still, investors should still see the software giant's income hike as a sign of solid operating momentum and impressive financial strength. These assets should help Microsoft navigate through any potential recession on the way without needing to miss a beat when it comes to investing in growth.
They also reflect a business that will likely deliver great returns over the next several years. A modest, but expanding, dividend is a nice bonus on top of an attractive bullish investing thesis.
