It's been a big year for technology giant Microsoft (NASDAQ:MSFT). The company has a new Chief Executive Officer in Satya Nadella, and unveiled a major new product in the Xbox One this year. In addition, Microsoft is in the early stages of a major push toward new software and services designed for the cloud. This is an important step for Microsoft: It can show the world that it can compete in the high-growth cloud business, and break the chains of the personal computer.
Fortunately, the company has done just that. All indications so far this year are that the company's strategic turnaround is really gaining traction. Microsoft has put up solid results this year, and enhanced shareholder value in September with a strong dividend increase.
Microsoft is becoming a world-class dividend stock
When investors search for dividend stocks to buy, the usual suspects, like utilities or consumer staples, probably come to mind first. But Microsoft is proving that technology companies can be big dividend payers, too. In fact, Microsoft pays a very healthy 2.4% dividend yield, which is above the average yield of the S&P 500 Index. Not only that, but Microsoft has steadily built a strong track record of significant annual dividend increases.
Microsoft just increased its dividend by 11%, to $1.24 per share annualized. Including this increase, Microsoft's five-year compound annual dividend growth rate is 19%.
Dividend growth backed by strong underlying fundamentals
It goes without saying that a dividend stock can only pay out distributions to shareholders if it has the supporting financials. Fortunately, Microsoft definitely fits the bill. It generates healthy cash flows that are more than enough to both reinvest to grow the business, as well as simultaneously reward shareholders.
Microsoft recently concluded its fiscal year, and saw great success across its core strategic initiatives. The devices and consumer segment posted 42% revenue growth last year, led by the new Xbox console, as well as Office 365. In addition, commercial cloud revenue soared 147% to a more than $4.4 billion annual run rate. Microsoft produced double-digit revenue growth in several other areas, including Windows volume licensing and server products.
For the year, revenue and diluted earnings per share grew 11.5% and 2%, respectively, versus the prior year. Free cash flow totaled $26 billion, which increased 8% year over year. At the same time, Microsoft paid $8.8 billion of dividends, meaning the company distributed just one-third of its cash flow in dividends.
This means Microsoft has the financial flexibility to also carry a strong balance sheet. In fiscal 2014, Microsoft paid down $3.8 billion of debt. This left the company with $20 billion of long-term debt, and $89 billion of shareholder's equity. That results in a long-term debt to equity ratio of just 23%.
The Foolish takeaway
Microsoft is making great progress in moving away from the personal computer and into cloud-based products and services. In fiscal 2014, the results spoke for themselves. Microsoft produced significant growth across several of these categories. Not only that, but Microsoft also put up solid revenue growth in devices, thanks largely to its highly successful launch of the Xbox One console.
Collectively, Microsoft generated solid growth in revenue and free cash flow last fiscal year. This allowed the company to continue its streak of generously rewarding shareholders through very high dividend increases. And, if its growth initiatives continue to gain traction, the company will be attractive to growth investors, as well.
Bob Ciura has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.