Microsoft Dividend Increase May Not Be A Sign Of Slow Growth

Microsoft (NASDAQ: MSFT), with too much cash and too little growth in Wall St.’s opinion, increased its dividend. But, investors could well be wrong. Microsoft may be about to experience a surge of growth and profitability.

The world’s largest software company will now have a quarterly dividend of $0.20 per share, reflecting a 4 cent or 25% increase over the previous quarter’s dividend. The dividend is payable December 8, 2011 to shareholders of record on November 17, 2011. The ex-dividend date will be November 15, 2011.

Microsoft’s shares are up only 7% during the past two years, compared to a 13% increase for the S&P 500, another sign of pessimism about the firm’s earnings future.

Investors are puzzled about how the company can make the transition from PC-based operating systems to wireless and portable platforms like those created by Google (NASDAQ: GOOG) and Apple (NASDAQ: AAPL). But that business sector is not closed to Redmond. The Microsoft joint venture with Nokia (NYSE: NOK) marries the Windows mobile operating system with the company that is still the largest handset maker in the world. That market share, combined with Microsoft’s R&D and advertising capability, means that the world’s largest software company has not lost the wireless and portable device race. Microsoft has also begun to get adoption of the Windows product on tablet PCs. Apple will likely control that industry for years with the iPad, but there is certainly room for a profitable No.2.

Microsoft’s business, servers, and tools units are likely to be highly profitable for years, eve as cloud computing becomes a norm. Microsoft’s Business Division had an operating profit of $3.6 billion last quarter on revenue of only $5.8 billion. Its Servers and Tools operating income was $1.8 billion on revenue of $4.6 billion. Microsoft has released its own cloud products. It is also a leader in virtualization software, which is essential to server farm productivity.

Wall St. is also worried that Microsoft continues to spend money on search, a market in which it has been only marginally successful. It is an operation not related to its core mission, critics warn. But, Microsoft’s joint venture with Yahoo! (NASDAQ: YHOO) has increased its market share to close to 30% in the U.S. There is still some chance that Microsoft could buy the troubled portable, and for much less than the $31 it offered three years ago.

Microsoft almost certainly does not need the $53 billion it had on its balance sheet as of last quarter. Unlike rival Apple, it has decided to move more of that cash to investors. There is no relationship between the balance sheet strength and the essentials of Microsoft’s future.

Douglas A. McIntyre