In July we posted to the blog a short piece, ‘show us the $, Mr. Softy’ (copied below) on Microsoft (MSFT) – discussing the mind boggling cash flow numbers they had just reported and their level of commitment to the dividend. Though they clearly have the ability to do much more – which in part is why we think a good reward for risk scenario exists – they did announce Tuesday a 25% jump in the dividend. Since they first started paying a dividend 8 years ago, outside of a $3.00 ‘special dividend’ payment in 2004 this is their largest percentage increase, exceeding last years 23% bump. At today’s price MSFT now sports a yield of 3.2%, or 85% above the current 10 year US Treasury. This commitment is a good sign and we believe will be an important factor in the total return for this stock (and for others that do the same) into the future. Additionally, Texas Instruments (TXN) last week boosted their payout 30%, a huge leap from the 8% increase they gave us last year. Amazingly, both of these companies have zero net debt and these cash payout enhancements are further tangible demonstrations of the balance sheet strength of many top tier technology companies. In the short run the market doesn’t care about these things, it would rather worry about ‘Operation Twist’, Greece and whether or not we are officially in a recession – all items that easily hold our attention. But as Ben Graham used to say, if ultimately the market is a ‘weighing machine’, we believe it will end up weighing the cash.
July 22, 2011: Microsoft (MSFT) recently reported earnings for their fiscal year end June 30th and the report highlights the capability they have to grow into a significant dividend payer. The measure that is most astonishing in our mind was reported free cash flow – this figure exceeded $24.7 billion for the year. To put this number into perspective, it means 74.6% of all the companies in the S&P500 have a smaller total market value than the free cash flow just generated by MSFT over the last 12 months! With less than $12 billion in long term borrowings and total cash on the balance sheet of approximately $53 billion, the opportunity to continue to pay investors a higher cash dividend is clearly present. Their current dividend commitment to investors is under $6 billion per year – this can and should increase. We’ll be watching.