Is Microsoft’s 10% Dividend Increase Enough for Your Long-Term Investment Strategy?
Microsoft’s stock (WKN: 870747) has been a focus for many investors due to its stable dividend policy and impressive growth numbers. Despite its current dividend yield of only 0.70%, many are questioning whether the stock is truly maximizing its potential. With 22 years of uninterrupted dividend increases and an annual dividend growth rate of over 10%, the question arises: Is now the right time to invest in this tech icon? In this article, we will analyze key metrics to provide you with the information needed to make an informed decision.
**Microsoft’s Success Story under Satya Nadella**
Since Satya Nadella took over as CEO of Microsoft in 2014, the company has transformed from a stagnant technology giant to a growth powerhouse. Under his leadership, Microsoft embraced early on cloud computing and artificial intelligence (AI) – two strategic decisions that have proven to be extremely successful. In particular, the Azure cloud platform has emerged as a key driver of the company’s growth. This transformation has not only positioned Microsoft as a leader in the technology industry but has also strengthened investor confidence.
**Recent Attention on Increased Capital Expenditures**
One topic that has garnered significant attention recently is Microsoft’s increased capital expenditures (CapEx). In the fiscal year 2024, these expenditures rose from $28.1 billion to $44.5 billion. While these high expenditures may seem alarming at first glance, there are good reasons why these investments could be profitable in the long run.
The demand for Microsoft’s cloud services, especially Azure AI, remains strong. To meet this demand, investments in infrastructure are essential. Microsoft has demonstrated in the past that it makes strategically sound decisions, and thus, confidence in the management is justified.
**Drivers for Future Growth**
Microsoft has solidified its position as a technology leader through continuous innovations. Dynamics 365, which now generates 90% of its revenue in the cloud and grew by 20% last year, plays a central role. Charles Lamanna, Corporate Vice President at Microsoft, emphasized at a tech conference in August that customers are now more focused than ever on concrete business outcomes through AI. This focus on return on investment (ROI) through AI enables Microsoft to further position its solutions in the market. Amy Hood, CFO of Microsoft, stated that investments in cloud and AI are expected to be monetized over the next 15 years.
**The Key to Personalization and Efficiency**
Another significant driver for Microsoft’s growth is the introduction of Copilot in Microsoft 365 and Dynamics 365. This AI-powered feature helps businesses streamline their processes by automating and optimizing everyday tasks. Lamanna highlighted that over 2 million users regularly use Dynamics 365 Copilot. Copilot seamlessly integrates into existing workflows and is tailored to the specific needs of businesses, significantly enhancing efficiency.
Despite impressive growth, there are challenges. Lamanna openly discussed at the conference the difficulties of managing longer sales cycles, especially for AI-driven solutions. Customers expect tangible results before embracing new technologies, which can prolong the sales processes. Additionally, increased competition in the business applications sector has raised customer expectations from providers.
**Microsoft’s Strong Financial Metrics**
Microsoft saw revenue increases across all business segments in fiscal year 2024. Particularly noteworthy is the growth in the cloud segment, which surged by almost 20% and surpassed the $100 billion mark for the first time.
The company’s margins have also improved: the gross margin increased by 90 basis points, the EBIT margin by 380 basis points, and the net margin by 290 basis points. Despite significant investments in infrastructure, Microsoft was able to increase free cash flow by 25%, a clear indication of the company’s financial health.
Microsoft has consistently increased its profitability over the years, as evidenced by substantial margin improvements. The gross margin has risen from 64% in 2016 to an impressive 69.8% in 2024. Furthermore, Microsoft has increased its EBITDA margin from 36.3% to a substantial 52.8%. This demonstrates that Microsoft not only generates more revenue but also efficiently converts it into profits.
**Strong Capital Returns**
Another highlight in Microsoft’s financials is its impressive return on capital. This metric, which measures how well a company utilizes its invested capital, has risen from 21.2% in 2016 to 29.7% in 2024. This indicates that Microsoft continues to effectively deploy its investments to create value for its shareholders.
In recent years, Microsoft has significantly reduced its debt. The debt-to-equity ratio has decreased from 75.8% in 2016 to 36.4% in 2024. This reduction demonstrates Microsoft’s consistent debt reduction efforts and minimizes financial risks.
**Is Now the Right Time to Invest?**
If you are considering investing in Microsoft stock, you are facing an exciting decision. Based on my calculations, the fair value of the stock is currently around $510. With the current market price at $417, this indicates that the stock is significantly undervalued.
Assuming you purchase the stock now at the current price of $417, you have the potential for a double-digit annual return based on the expected fair value.
Don’t Forget About Microsoft’s Dividend
Microsoft has been paying a consistent dividend for 22 years and has increased it every year. In fiscal year 2024, the dividend was $2.93 per share, resulting in a current dividend yield of 0.70% at a stock price of $417.
While Microsoft may not be among the top dividend stocks, in the past year alone, the dividend has increased by 10.15%, and over the last five and ten years, the growth has been significantly more than 10% annually. Therefore, if you are investing for the long term, you can expect a steady increase in your dividends.
Microsoft follows a rather conservative dividend policy. The payout ratio in the last fiscal year was less than 25%. This ratio is healthy and allows room for investment in growth. A low payout ratio also means that the company is less likely to struggle to cut dividends in challenging times.
Microsoft has established itself as a reliable dividend payer. Paying dividends continuously for 22 years and increasing them each year speaks for itself. This stability makes the stock particularly attractive to long-term investors who value secure and steadily growing returns.
**Conclusion**
Microsoft continues to evolve as a technology giant, leading in critical areas of the future such as cloud computing and artificial intelligence. Under the leadership of Satya Nadella, the company has undergone a remarkable transformation and established itself as an innovation leader in a competitive industry. The robust financial metrics, including impressive margin increases and a strong capital return, underscore the company’s financial health and potential for further growth.
While Microsoft’s dividend yield may not be the highest compared to other companies, its consistent dividend growth and reliable payout policy make it an attractive option for long-term investors. The stock offers a balanced combination of growth potential and stable returns, making it worth considering for your long-term investment strategy.
