Citi: Microsoft Corporation Expected To Boost Dividend 25% This Month

Microsoft Corporation MSFT will soon start playing catch-up with other large-cap tech companies in the rate at which it returns capital to shareholders in the form of dividends and buybacks, an analyst said Tuesday.

Citi's Walter H. Pritchard expects the company to boost its dividend later this month by 25 percent to $1.40 per share. Microsoft may also set a 2015 free cash-flow payout ratio target of up to 70 percent, from a current 58 percent.

But the average large-cap tech company will pay out 83 percent of free cash flow in 2014, according to Pritchard, who is Neutral on Microsoft with a $41 target.

Investors are expecting a "meaningful uptick in dividend" and look to the company's last big dividend increase of 25 percent in 2011.

"That sets the bar," Pritchard said, noting that disappointment and a lower stock price is likely to ensue if expectations aren't met.

Although the software company has about $86 billion in total cash, just 10 percent of it is based in the United States. Moreover, only about 25 percent of Microsoft's annual free cash flow is generated domestically. Given tax penalties for repatriating cash, "capital return therefore comes down to how much the company is willing to borrow," Pritchard said.

Assuming Microsoft aims to retain its investment-grade credit rating, Pritchard figures debt that can be raised is capped at $50 billion. Given those constraints, the company can boost free-cash payout to between 70 percent and 80 percent, "while still retaining flexibility" for things like acquisitions, the analyst said.

Microsoft traded recently at $46.69 per share, up one percent.

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Posted In: Analyst ColorNewsDividendsPrice TargetReiterationBuybacksAnalyst RatingsCitiWalter H. Pritchard
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