After a $900 million write-off for its Surface tablet in July, the late August announcement-under-pressure of CEO Scott Ballmer’s retirement, and the less than enthusiastic response to the early September news it will spend $7 billion for Nokia’s cell phone business, Microsoft’s (MSFT) just-announced 22% dividend hike smacks of “if you can’t please ‘em, at least pay ‘em more.”
After being teased with a stronger than expected first quarter report that sent the stock up 25% from mid April to early July, Microsoft has fallen back during its the past two months:
NASDAQ:MSFT data by YCharts
The dividend hike also comes on the heels of the second quarter jump in the 10-year Treasury rate. Income-starved investors who have been migrating over to dividend paying stocks spent 2011 and 2012 enjoying dividend yields that exceeded the T-note payout. But starting with the mid-May rate spike, Microsoft (along with plenty of other blue chips) lost its appeal as a bond-substitute; its current 2.8% payout is now below the 2.9% Treasury rate.
Factor in the just-announced rate hike and Microsoft has a better chance of mollifying the income crowd, as its projected dividend yield based on four quarters of the new quarterly level is a bond-beating 3.4% at today’s entry price.
Microsoft also re-authorized a $40 billion share buyback that was scheduled to expire at the end of this quarter. Unlike Apple’s (AAPL) massive stock buyback announcement earlier this year, Microsoft did not give a time frame for when (and if) it expects to fulfill that $40 billion repurchase.
Microsoft’s dividend move is pretty much the script these days for big tech companies doing time in the value bin. Apple famously started paying out a dividend this year. Cisco (CSCO) has nearly tripled its payout over the past three years and Oracle (ORCL) has boosted its payout 140% over that stretch. That makes Intel’s (INTC) 40%+ increase over the past three years looks paltry (to be clear: it’s anything but.) Still, all of those are story stocks, where it’s not exactly a fairy tale at the moment.
FactSet recently noted that 85% of dividend paying stocks in the tech sector increased their payouts in the second quarter by at least 10%, suggesting there might be a dividend growth (if not dividend yield) stock in the tech sector beyond the beleaguered big boys.
Using YCharts Stock Screener tool turns up a list of 67 stocks in the S&P 500 tech sector. Moving the dividend yield slider past zero, eliminates the non-dividend payers from the screen, leaving 45 dividend payers. Adding one-year dividend growth and payout ratio as two filters, creates a good start point for further investment research.
Science Applications International Corp (SAIC) had the largest dividend jump over the past year, but a payout ratio over 200% doesn’t scream stability. Moreover, the company is separating its tech work for the U.S. military from its non-military operations this month. The military arm will keep the SAIC name, while the faster growing business will now operate as Leidos (LDOS) beginning on September 27th. Part of the deal is a one-time $295 million dividend payout to SAIC shareholders -- explaining why it topped this screen.
Moving past other companies with high payout ratios -- including Seagate Technology (STX) and Texas Instruments (TXN) -- Qualcomm (QCOM) jumps out as a tech company that has managed to keep key financial metrics sloping upward of late, a bit of a rarity in the tech sector these days.
On the dividend front, Qualcomm’s 2% yield isn’t a bond-beater. But for income growth, Qualcomm, which more than doubled its payout over the past five years, is positioned to keep delivering. While the payout ratio based on earnings is a somewhat high 57%, Qualcomm’s cash dividend payout ratio is below 30%.
Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at email@example.com. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.
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