Dividend and Buybacks Make Microsoft's Total Return Attractive, Analyst Highlights

Microsoft Corp MSFT increased its quarterly dividend by 10% to $0.68 per share. Morgan Stanley analyst Keith Weiss kept an Overweight rating and $354 price target on Microsoft.

Weiss said the dividend hike highlights the stock's "durable high-teens total return profile" when factored along with Microsoft's high-teens percentage EPS growth. This dividend raise is consistent with the percentage increase in the past several years that has hovered around the high-single-digit/low-double-digit range.

Weiss considered the dividend yield just one component of capital return. He expects the buybacks to continue. 

Weiss said the management views dividends as a permanent commitment, explaining the increases lagging its operating income growth leaving room for continued share repurchases. 

Microsoft had ~$105 billion in cash and short-term investments on the balance sheet as of June 30, 2022, and his expectation of ~$70 billion in FCF generation in FY23. 

Microsoft repurchased an average of ~$8 billion in stock per quarter throughout FY22. He expects Microsoft to repurchase close to $9 billion per quarter this fiscal year. Microsoft has reduced its weighted average diluted shares outstanding every fiscal year since FY 2005. 

More broadly, the dividend represents a consistent source of income and one component of the durable high-teens total return profile he forecasted for Microsoft. 

Weiss forecasted mid-teens revenue growth, outpacing the cost of goods sold, with gross profit growth also outpacing operating expenditure growth. This yields an 18% EPS CAGR through FY25, driving Microsoft's high-teens total return profile.

Price Action: MSFT shares traded higher by 0.50% at $243.66 on the last check Wednesday.