Microsoft Investors: Don't Get Too Excited About A Dividend Raise

During each of the past five years,

announced a dividend hike sometime during September 16-20. An increase to a company's dividend payout is usually cheered by investors, but Citi analyst Walter Pritchard won't get excited. The analyst commented in a note on Tuesday that a September dividend hike announcement is a "non-event." Pritchard continued that a year ago Microsoft was facing potential upside catalysts in both capital returns and operating expenditure cuts. Today, these initiatives are "behind the stock" and the company is returning more capital (100 percent free cash flow today compared to 50-60 percent a year ago) versus its peers at 80 percent. Pritchard noted that Microsoft had "genuine interest" in acquiring

which would have consumed "significant" capital and debt capacity. On the other hand, the company has "more flexibility" around share buy-backs which it leaned on for a mechanism of capital return while large acquisitions represents "negative optionality" to incremental capital returns and operating expenditure controls. Pritchard further added that a focus on share repurchases versus dividends serves three purposes for Microsoft: 1) the timing of capital returns doesn't have to occur in frequent intervals, 2) absolves the company of any long-term capital return commitments as cutting or maintaining buybacks is "more palatable" than doing the same with dividends, and 3) the combination of points 1 & 2 allow the company flexibility to pursue M&A opportunities, if it deems it strategically viable. Regardless of Microsoft's capital return strategy, Pritchard stated the company continues to face challenges in "remaining relevant" with developers and end-users that could impact its "highly" profitable Windows client and enterprise server and cloud businesses. Finally, the emergence of alternative platforms and competitive headwinds (such as iOS, Android, Chrome, AWS) makes it "more difficult" for Microsoft to successfully monetize its proprietary software. Shares remain Sell rated with an unchanged $38 price target.