Why the Microsoft Dividend Hike Means So Much

Cisco Systems Inc. (NASDAQ: CSCO) has become the king of dividends in technology with its almost 2.8% yield. Still, its market cap is way behind at $221 billion. Cisco’s last dividend hike was almost 14%.

Intel Corp. (NASDAQ: INTC) has a hefty dividend yield of 2.60%, and its market cap is just $212 billion. Intel’s last dividend hike was by 10%.

Before overly worrying about why Microsoft shares were down on Wednesday, it’s important to understand that some analysts and investors may have wanted more. That may sound like greed, but it’s par for the course in the investing community. Merrill Lynch recently kept a Buy rating on Microsoft, but it had forecast an expected 15% to 20% hike.

Reuters has noted that Morgan Stanley sees this as being below Microsoft’s trailing 12-month operating income growth of about 20% and that it may be less than investors were expecting. That said, Morgan Stanley previously noted a high probability of an above-average dividend hike.

Before assigning too much value on Morgan Stanley’s view, consider what an annualized payout of $1.84 per share means when you get into the numbers. Thomson Reuters has earnings estimates of $4.28 per share for fiscal year 2019 and $4.91 for fiscal 2020. Companies have to leave at least some buffer against earnings, and analysts and investors frequently punish companies if they pay out too much of their normalized earnings per share in dividends. After all, that can negatively impact an ability to spend on R&D and stock buybacks and to make acquisitions.

This dividend hike will be finalized at the Microsoft annual shareholder meeting set for November 28, 2018, but you can expect no objections. The dividend is payable on December 13 to shareholders of record on November 15, and the ex-dividend date, where the stock price will be reflected, will be November 14. Shareholders at the close of business on September 26, 2018, will be entitled to vote at the annual shareholders meeting.

Microsoft shares were last seen trading down 1.4% at $111.65 on Wednesday morning. Maybe some investors wanted a larger dividend hike, but having a nearly 10% dividend hike is still quite impressive. Microsoft has a 52-week trading range of $72.92 to $113.73 and a consensus analyst target price of $123.24.

Sometimes dividend hikes are well received and sometimes they are used as an excuse to take some profits. The latter seems to be the case for the time being.