How Microsoft’s healthy cash flow supports its dividend program



Cash, debt, dividends, and cash flow

Microsoft’s (MSFT) total debt as of 2Q15 increased to $26.56 billion as compared to $21.97 billion in 1Q15. In 2Q15, Microsoft’s short term debt increased to $8.3 billion in 2Q15 as compared to $2 billion in 1Q15. Microsoft’s has incurred high debt primarily to fund dividends and share buybacks.

The company’s cash reserves stood at $90.25 billion, compared to $89.2 billion in 1Q15. It generated operating cash flow worth $4.34 billion. The company spent $1.49 billion to purchase capital assets and $2.79 billion on acquisitions in 2Q15. Microsoft’s strong cash position provides a buffer against any uncertainties the company might face in the near future.

The above chart shows the revenues and margins of Microsoft since 2009. In the last several quarters, Microsoft has struggling with falling margins, which impacted its profits and cash reserves. However, 2Q15 saw a marginal improvement in margins.

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If Microsoft is able to cushion its cash reserves and improve cash flow position and reduce debt, this can benefit individual investors. This also benefits ETFs such as the Powershares QQQ Trust (QQQ) and the Technology Select Sector SPDR Fund (XLK), which have 8.00% and 9.61% exposure to Microsoft, respectively.

Dividend and buyback program

In 2Q15, Microsoft announced a cash dividend of 31 cents per share to its shareholders. The company spent $2.15 billion to repurchase shares, and $2.55 billion to pay dividends to its shareholders in 2Q15. The company announced its plans to conclude the ongoing $40 billion share buyback program by December 2016. Its peer Apple (AAPL) also announced a recent $90 billion share buyback program. IBM (IBM) plans to request additional share repurchase authorization at its April 2015 board meeting.

As we discussed in Microsoft’s 1Q15 earnings review, a majority of its cash is parked outside the US that makes it vulnerable to the vagaries of foreign exchange fluctuations. As a result, the strengthening dollar impacted its 2Q15 revenues. We have explored the impact of dollar appreciation earlier in this series.


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