Microsoft Corporation (NASDAQ:MSFT)
In the same spirit as Intel Microsoft will probably have a rough time in the near-term as well. The long-term success of both Intel and Microsoft are linked in the form of Windows 8 tablets, although Microsoft is actually a far more diversified company than many people think. While the Windows and Office divisions make up a large portion of revenue the Server and Tools division is actually about the same size as either one of them. This includes Microsoft SQL Server, Windows Server, and Visual Studio. There’s also the Entertainment division, which includes the Xbox, Skype, and Windows Phone. This division isn’t quite as big but it’s still significant.
Microsoft Corporation (NASDAQ:MSFT) increased its quarterly dividend late last year by 15% to $0.23 per share, pushing the yield up to about 3.2%. Historically Microsoft has grown its dividend at an annualized rate of 28% over the past decade, but much like Intel Corporation (NASDAQ:INTC) this rate has recently slowed. The payout ratio was just 22% of free cash flow and 38% of net income in 2012, meaning that Microsoft has plenty of room to grow the dividend. Another positive is that Microsoft has about $64 billion, or $7.60 per share, of net cash on the books. This money could easily go towards a dividend boost or share buybacks, which would decrease the payout ratio by reducing the number of shares.
According the my table from the previous article Microsoft has to grow its dividend at about 9% annually to be fairly valued, and it seems that this shouldn’t be any problem at all. The average analyst estimate for 5-year annual earnings growth is just above 9%, and with such a low payout ratio and a mountain of cash I expect dividend growth to be substantially higher.
Based on the share price as of this writing I’ll add 173 shares of Microsoft to my Ultimate Dividend Growth Portfolio with a cost basis of $4,980.67. This position will generate a projected annual dividend payment of $159.16.
Cisco Systems, Inc. (NASDAQ:CSCO)
Cisco only started paying a dividend in 2011 and has already raised it three times. The most recent increase earlier this month was a 21% hike to $0.17 per quarter per share, putting the projected yield at 3.16%. Cisco spent most of the last decade buying back shares instead of paying a dividend, but the new policy now seems shifted towards returning profits to shareholders in a more balanced way.
Cisco Systems, Inc. (NASDAQ:CSCO) is the behemoth of the networking industry, with a dominant market share in switches and routing, the backbone of the internet. Cisco has continued to grow revenue despite increased competition, and the most recent quarter saw a year-on-year revenue increase of 5%. Like Microsoft Corporation (NASDAQ:MSFT) Cisco is sitting on a huge pile of cash, with $31 billion or $5.77 per share in net cash on the books.
Based on the projected dividend of $0.68 annually Cisco’s payout ratio in 2012 was just 35% of free cash flow and 45% of the net income. Much like Microsoft Cisco is in a position where it can substantially increase the dividend by expanding the payout ratio. On average analysts expect 8.27% earnings growth annually over the next 5 years, and with a yield similar to that of Microsoft Corporation (NASDAQ:MSFT) this combined with the low payout ratio should easily allow Cisco to beat the 9% required growth rate.
If Cisco Systems, Inc. (NASDAQ:CSCO) can grow FCF at, say, 6% per year for the next ten years the company could increase its dividend by 10% annually and reach a 50% FCF payout ratio at the end of the tenth year. And if the company buys back its own stock during this time the dividend could be raised even faster.
Based on the share price as of this writing I’ll add 233 shares of Cisco to my Ultimate Dividend Growth Portfolio with a cost basis of $5,018.82. This position will generate a projected annual dividend of $158.44.
