Microsoft Raises Dividend And Announces Stock Buyback

Microsoft Corporation (Ticker Symbol: MSFTWealth Strength IndexMSFT is Extremely Flat and trending Down) announced this week that is going to raise its quarterly dividend five cents up to .51 cents per share, which shows an increase of 11%.  The Redmond, Wash.-based tech giant additionally announced a stock buyback program that could go as high as $40 billion. Stock buybacks, or share repurchase programs, are when a company buys back its own shares from the market with an objective to reduce the number of shares outstanding thus helping to increase the value of the remaining shares.   

This comes after a solid quarterly earnings report by Microsoft from earlier in the quarter. Microsoft reported an earnings per share beat of $1.37 per share vs. Wall Street analysts’ expectations of $1.21.  Additionally, revenue reported came in at a slight beat of $33.72 billion vs. Wall Street analysts’ expectations of $32.77. Microsoft expects to create between $31.7 billion and $32.4 billion in revenue across its three business segments in its fiscal first quarter.  

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The chart above is a long-term weekly chart of Microsoft’s stock going back to the start of the new millennium (roughly 20 years). The stock started off the year 2000 on a weak note fueled by the dot-com crash.  After finding support around the $20.00 price level, the stock spent the next 14 years trading within a horizontal channel. Horizontal channels are usually viewed as continuation patterns and are areas of indecisiveness between buyers and sellers.  The stock is a point at which supply and demand are relatively balanced and its price trades within a certain range. Usually, the same highs and lows are tested multiple times within the horizontal channel. 

Microsoft’s stock finally broke out from its channel in the first quarter of 2014. The stock had a minor rally and found support multiple times at its 100-week moving average.  Microsoft broke above its highs from the millennium and proceeded to rally over 170% before forming a bull flag. Bull flags are viewed as continuation patterns. They represent consolidation in the market and are usually seen after large and fast moves.  The market usually continues to trade in the same direction as the trend or move. Bull flags are formed when a stock creates lower tops and lower bottoms with the pattern slanting against the trend and its trend lines running parallel resembling a pole with a flag.  Microsoft broke from that flag to the upside and traded at an all-time high of $142.37 on the announcement of the dividend hike and stock buyback program.

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(Chart above courtesy of ​www.tipranks.com​)  

Based on a survey of 23 analysts offering 12-month price targets, the average price target for Microsoft’s stock is $153.48. According to that number, the stock is priced at a discount relative to Wall Street’s analysts and could be considered undervalued around current levels near $141.09

Share repurchase programs can be a great way to increase the value of a company’s stock price.  Buybacks also give confidence to the shareholders because the company’s management is making a statement that the stock is undervalued relative to the current price or fundamentals.  Buybacks can provide a steady flow of demand for stock which is helpful during periods that lack strong catalysts.

Investors in the space should look to Microsoft’s next earnings release on October 25th for fresh news within the company.  

 


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