How Microsoft's dividend hike and new $60 billion buyback program stack up

By Emily Bary

Only three U.S. companies have ever announced buyback programs bigger than Microsoft's latest - though the new dividend yield is still low relative to those of fellow Dow components

Microsoft Corp. is making a series of shareholder-friendly moves as it ups its dividend and boosts its stock-buyback program. Shares are up more than 1% on Tuesday following the updates.

The technology giant announced Monday afternoon that it will increase its quarterly dividend by 8 cents, or 10%, such that the new payout will be 83 cents a share. That will be payable Dec. 12 to Microsoft (MSFT) shareholders of record as of Nov. 21, which is also the ex-dividend date.

"Monday's updates suggest a continuation of the company's existing capital allocation framework rather than any change in tune," Deutsche Bank analyst Brad Zelnick wrote in a note to clients. Regardless, he said the moves are "an important signal that [management] and the board are committed to profitable growth and robust free cash flow generation during the current elevated, AI-driven investment cycle."

Microsoft conducted a 10% dividend hike last year as well.

Even with the dividend hike, Microsoft will be near the bottom of the Dow Jones Industrial Average DJIA when it comes to its implied yield. There are 27 components in the index that pay dividends; of those, Microsoft ranks third to last with its current yield of 0.7%, according to FactSet data. Its new dividend leads to an implied yield of 0.77%, which would help Microsoft jump a spot and rank fourth to last.

See also: Verizon grows lead as Dow's highest dividend yielder with annual hike to payout

Just Apple Inc. (AAPL) and Salesforce Inc. (CRM) have lower yields than Microsoft, while the company's latest move will push it ahead of Visa Inc. (V) It's common for hot technology stocks to have lower yields, as those companies must strike a balance between returning cash to shareholders and investing in the business.

Meanwhile, Microsoft is launching a new $60 billion buyback program. That ranks as the third largest among all U.S. companies this year, based on data from Birinyi Associates as of late August. The only companies to announce bigger share-repurchase authorizations so far this year are Apple ($100 billion) and Alphabet Inc. (GOOG) (GOOGL) ($70 billion). Nvidia Corp. (NVDA) and Meta Platforms Inc. (META) each announced $50 billion programs of their own.

Don't miss: Nvidia's stock-buyback plan is one of the biggest of 2024. Is that a good thing?

Microsoft's new buyback program is equivalent in size to the one the company announced back in September 2021. In the U.S., besides Apple and Alphabet on multiple instances, only Chevron Corp. (CVX) has ever announced a buyback program of more than $60 billion, when it embarked on a $75 billion program in early 2023, according to the Birinyi Associates data.

Microsoft is expected to further grow its capital expenditures as large technology companies race against each other to develop the best artificial-intelligence capabilities. Still, Deutsche Bank's Zelnick thinks Microsoft will post free cash flow in the range of $70 billion for fiscal 2025 and see double-digit growth on the metric for multiple years beyond that.

Free cash flow at those levels would be "more than enough" to cover dividend payments, share repurchases and other business investments, he wrote.

More: Apple's huge stock buyback proves one thing, which is that companies are lousy market timers

-Emily Bary

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09-17-24 1140ET

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