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Why Microsoft Keeps Spending Billions on Buybacks and Dividends

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Microsoft took second in IT space for share buybacks

Previously in the series, we discussed how each of Microsoft’s (MSFT) operating segments contributed towards overall revenues as well as their contribution towards margins. We also looked at the balance sheet strength of the company by looking into its cash reserves and debt position.

Now, let’s have a look at its cash flows and the amount spent on dividends and share buybacks. In fiscal 2Q16, Microsoft generated $3.6 billion in free cash flow (or FCF), an increase of 25% on a YoY basis. Free cash flow allows us to see the cash left over after capital expenditures are accounted for. This money is most likely to reach the shareholder, making it of particular significance to investors and shareholders. Microsoft stated that it returned $6.5 billion to its investors in fiscal 2Q16 in the form of share buybacks and dividends.

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Bond issuances fuel share buybacks

In its December 2015 report, Factset stated that the IT (Information Technology) sector spent $45.9 billion on share buybacks in 3Q15, the highest in comparison to other industries. As the above chart shows, Apple (AAPL) spent the maximum on share buybacks, followed by Microsoft. Oracle (ORCL) and Qualcomm (QCOM) were other technology players who made the top ten list.

In September 2015, a Wall Street Journal report stated that many big US companies are increasingly heading towards the bond market to fund their dividend and share buybacks, thus benefiting their investors and shareholders. The report further stated that companies like Microsoft, Qualcomm, and Oracle, who were responsible for some of the largest bond issuances in 2015, used proceeds toward share repurchases and dividends. Please read Why Bond Investors Are Skeptical about Oracle’s Bond Issuance to learn more.

Investors who wish to gain exposure to Microsoft could consider investing in the PowerShares QQQ Trust, Series 1 ETF (QQQ). QQQ invests 8.4% of its holdings in Microsoft and 28.4% in the application software industry.

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