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Why Did MSFT’s Dividend Yield Fall in 2017?

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Revenue in 1Q18

Microsoft’s (MSFT) revenue rose 12% in 1Q18. Service and other revenue noted growth while product revenue fell. US and other countries recorded growth during the period. Productivity and Business Processes and Intelligent Cloud drove the growth, while More Personal Computing recorded flat growth.

Diluted EPS in 1Q18

Gross margin rose 15%. Operating expenses rose 16%. As a result, operating income rose 15%. Other income grew during the period due to growth in dividend and interest income offset by rising interest expense. All of these factors translated into 16% growth in net income. Diluted EPS rose 17% further enhanced by share buybacks. The company has maintained a strong free cash flow position.

How did the dividend yield and price perform?

The decline in the dividend yield curve for 2017 is due to higher price gains compared to dividend growth. The dividend growth was cut in half while the price gain tripled in 2017 compared to 2016. The stock prices have risen 35.4% on a year-to-date (or YTD) basis. The dividend growth has slowed down in 2017. Microsoft’s PE of 31.1x compares to a sector average PE of 404.9x. The dividend yield of 1.9% compares to a sector average dividend yield of 1.3%.

How does the company compare to the broad indexes?

The S&P 500 (SPX-INDEX) (SPY) offers a dividend yield of 2.3%, a PE ratio of 23.3x, and a YTD return of 18.4%. The Dow Jones Industrial Average (DJIA-INDEX) (DIA) has a dividend yield of 2.2%, a PE ratio of 21.9x, and a YTD return of 23.1%. The NASDAQ Composite (COMP-INDEX) (ONEQ) has a PE ratio of 25x and a YTD return of 27.1%.

The Vanguard International Dividend Appreciation Index Fund (VIGI) is a dividend ETF with 11% exposure to technology. It has a PE of 26.8x and a dividend yield of 1.7%. The WisdomTree DEFA (DWM) is a dividend ETF with 2% exposure to technology. It has a PE of 17.5x and a dividend yield of 3%.

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