Microsoft Catalysts Limited Until Windows 8, But Yield Growth Possible

Even if Microsoft’s next operating system upgrade is a year in the offing, its yield is nothing to sneer at.

One smart dividend-focused value investor we talked to this week thinks Microsoft (MSFT) shares are attractive for the dividend growth that could reward patient investors. Windows 8 launches in October 2012 and then an upgrade cycle will follow. Moreover, the percentage of earnings that Microsoft pays out as a dividend — 25% — is low, leaving room for increases.

America’s tech giant reported $12.8 billion in cash on its balance sheet at of the end of September.

“The stock is selling at around 9x earnings, you get a 3% yield, and it has been out of favor, so … it is not over owned. And there is a story for dividend growth,” says Jim Cullen, who manages the Cullen High Dividend Fund (CHDEX).

Microsoft just boosted the quarterly yield to 20 cents per share from 16 cents. The dividend has increased 23% in the past year, 13% in the past three years, and nearly as much over five.

The shares, changing hands near $26.59, are not expensive at 9.6 times the 2012 consensus earnings estimate of $2.81 per share. The S&P 500 is trading at about 12x estimates for next year and it’s paying 2.0% while the Nasdaq 100 is trading at 10.8x, and it’s yielding 0.8%.

We’ll grant you that high-margin businesses like Windows and Office aren’t doing much this year. Rick Sherlund and his team at Nomura on Wednesday trimmed estimates for gross margin and thus earnings in fiscal years 2012 and 2013. The reason: to better adjust for impacts from “Skype, Yahoo traffic acquisition costs, head-count related expenses within the server business from growing consulting services, and third-party royalties within the Xbox business,” he writes.

But Nomura left revenue estimates unchanged, and reiterated a favorable view in anticipation of Windows 8.

Microsoft stock is down about 4% this year; the Standard & Poor’s 500 Index is down about 2%. Nomura’s Microsoft price target of $30 means upside of nearly 13%. And that’s not including what could be an improving yield.