Microsoft's New $60 Billion Buyback Program and Dividend Hike

Microsoft Corp. is making moves to benefit shareholders, announcing an increase in its dividend and expanding its stock buyback program. On Monday afternoon, the tech giant revealed an 8-cent or 10% hike in its quarterly dividend, raising it to 83 cents per share. This new payout is scheduled for December 12, with shareholders of record as of November 21 eligible to receive it, which is also the ex-dividend date. This marks the second consecutive year Microsoft has raised its dividend by 10%.

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Despite this increase, Microsoft will still rank near the bottom of the Dow Jones Industrial Average (DJIA) in terms of implied yield. Among the 27 DJIA components that pay dividends, Microsoft currently ranks third to last with a yield of 0.7%, as per FactSet data. The new dividend boosts this implied yield to 0.77%, allowing Microsoft to move up slightly, placing it fourth to last. Only Apple Inc. and Salesforce Inc. have lower yields than Microsoft, while the dividend hike will push Microsoft ahead of Visa Inc.

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Low dividend yields are typical for popular technology stocks, as these companies often balance the need to return cash to shareholders with the necessity of reinvesting in their business. Tech companies like Microsoft frequently prioritize using excess cash for growth and development initiatives, which can result in lower dividend payouts compared to more mature, slower-growing firms.

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In addition to the dividend hike, Microsoft has introduced a new $60 billion stock buyback program. According to Birinyi Associates, this ranks as the third-largest buyback among all U.S. companies this year, as of late August. Only Apple, with a $100 billion authorization, and Alphabet Inc., with a $70 billion program, have announced larger share repurchase plans so far in 2024. Other significant buyback programs this year include those from Nvidia Corp. and Meta Platforms Inc., each announcing $50 billion in stock repurchases.

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Microsoft's latest buyback program mirrors the size of its previous one, announced in September 2021. Within the U.S. market, apart from Apple and Alphabet’s multiple substantial buyback announcements, only Chevron Corp. has ever unveiled a buyback program exceeding $60 billion. Chevron's $75 billion buyback was initiated in early 2023, highlighting the scale of Microsoft's current program.

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Stock buybacks are a common way for companies to return value to shareholders. By reducing the number of shares outstanding, buybacks can increase earnings per share (EPS) and, in some cases, support the stock price. However, the efficacy of buybacks as a tool for creating shareholder value can be a topic of debate. Critics argue that companies often mistime buybacks, repurchasing shares at elevated prices rather than during market downturns when shares may be undervalued. Proponents, on the other hand, view buybacks as a flexible mechanism for companies to manage capital and reward shareholders, particularly when growth opportunities are limited.

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Microsoft's announcement comes at a time when technology companies are facing pressure to balance rewarding shareholders with investing in future growth. Microsoft's expansion of its buyback program suggests confidence in its financial position and future prospects. As of Monday's after-hours trading, Microsoft shares were up 0.5%, following a 0.2% gain during regular trading hours. Overall, the stock has risen 16% so far this year, reflecting investor optimism about the company's performance and strategy.

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The decision to increase the dividend and authorize a substantial buyback program reflects Microsoft's ongoing commitment to returning value to shareholders. It also signals the company's ability to generate substantial cash flow, allowing it to support both shareholder returns and investments in its business. Given the competitive landscape in technology, Microsoft's strategy aligns with industry norms, where companies often opt for share repurchases and modest dividend payouts to maintain a balance between rewarding investors and funding growth initiatives.

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While Microsoft's implied yield remains on the lower end among Dow components, this is not unusual for tech firms. Companies like Microsoft, Apple, and Salesforce typically offer lower yields because they reinvest a significant portion of their profits into research and development, acquisitions, and other growth-oriented activities. This approach can lead to higher long-term capital appreciation, even if the immediate income from dividends is modest.

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The $60 billion buyback is significant not only in its size but also in its timing. With markets fluctuating and economic uncertainties present, Microsoft's commitment to repurchasing shares indicates a belief in the company's long-term value. It also provides a signal to the market about the management's confidence in Microsoft's future performance.

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In summary, Microsoft's recent actions — increasing its dividend and initiating a sizable stock buyback — demonstrate a clear strategy to reward shareholders while still retaining the flexibility to invest in future growth. By balancing these priorities, the company continues to navigate the complex dynamics of the technology sector, where managing shareholder expectations and pursuing innovation go hand in hand.

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