We applaud the wide-moat software giant for renewing its share-buyback program and lifting its quarterly dividend.
09:45 PM | Email Article
On Tuesday, Sept. 20, Microsoft
announced a pair of initiatives to increase capital returns to shareholders. First, the board has approved a $40 billion share repurchase program, essentially replacing the previous $40 billion buyback plan initiated in 2013 that was targeted for completion by the end of calendar 2016. Second, the company is increasing its quarterly dividend 8% to 39 cents per share. We applaud Microsoft’s commitment to returning cash to shareholders via this two-pronged approach, but our $62 fair value estimate is intact and we maintain our wide economic moat rating.
Rodney Nelson is a senior equity analyst for Morningstar.
We are generally not surprised by today’s announcement, as we fully expected Microsoft to re-up its share buyback program, though we are pleased to hear the magnitude of the firm’s plan for capital returns. We do harbor some concerns about Microsoft’s elevated level of share repurchases over the last couple of years (the firm bought back roughly $32 billion worth of stock between fiscal 2010 and 2014; Microsoft has bought back just over $29 billion worth of stock in the last two years alone), but our concerns are largely mitigated by the concurrent increase in the dividend and an active backdrop for the company as it plans to push more aggressively into the cloud, highlighted by the Azure platform, Office 365, Dynamics, and the pending purchase of LinkedIn.
While we estimate more than 80% of Microsoft’s cash horde (which we believe totals roughly $130 billion following a $20 billion debt offering in August) is held overseas, we think Microsoft will have ample cash to fund this program. Assuming the share repurchase program will be spread over three years similar to the previous program, we believe domestic cash and our forecast of roughly $75 billion in free cash flow over that period will allow for ample investment in the business alongside the firm’s new dividend and repurchase policy, though we would not rule out Microsoft again tapping the credit market over that time frame.
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