Microsoft: Buyback Decisions Tell A Story

Summary

  • Microsoft announced new capital return plans including an 8% dividend hike.
  • The new stock buyback plan has limited ability to impact the stock considering the surging stock over the last few years.
  • The net payout yield is average for the current market.

After the close, Microsoft (NASDAQ:MSFT) released that the company will add to the existing capital return program. The total of the share repurchase program is attention grabbing, but investors need to consider whether the amount is actual impactful to the stock.

A key factor in the capital return program is that the stock trades at multi-year highs around $57. Possibly more important is grasping the current market valuation of $445 billion and the propensity of Microsoft to spend the amount in a meaningful time.

Capital Returns

The company increased the dividend and approved a new share buyback in one swift move. The quarterly dividend was increased $0.03 to $0.39. The new dividend yield will equal 2.7% when the first payment at this rate takes place on December 8.

Possibly the more important aspect of the announcement is the new $40 billion stock buyback. The plan has no expiration date and adds to the existing $7.1 billion remaining on the previous repurchase plan on track for completion this year.

The good news is naturally that Microsoft clearly follows through on proposed share buybacks. The bad news is that the plan sounds significantly better than reality.

First, the $40 billion approved amount only equates to roughly 9% of the outstanding shares. Now if this amount was an annual level, the stock could see huge upside. Second, the past $40 billion repurchase plan is taking around three years to complete. Third, Microsoft issues a decent amount of stock options each year that somewhat offset the benefits of stock repurchases.

Over the last 5 years, Microsoft has spent the following amounts on stock buybacks plus the quarterly dividends that will now top $3 billion.

Source: seekingalpha.com