Before the Move: Watch Microsoft ahead of potential dividend boost

Microsoft (MSFT) has been paying dividends since 2003, growing them every year for over a decade, and usually announces the raise on the third Tuesday of September. While shares have underperformed the market the day after the dividend announcement, Morgan Stanley analyst Keith Weiss expects this time to be different as investors have higher confidence in the durability of growth and an increase in the dividend yield above 2% would likely attract more income-oriented investors. 'BIG' DIVIDEND RAISE: In a research note to investors late last month, Morgan Stanley analyst Keith Weiss highlighted that Microsoft typically announces a dividend raise in mid-September and pointed out that the company has raised its dividend by an average of 14% annually since the financial crisis in 2009, when the dividend was unchanged. Microsoft has underperformed the market the day after its dividend announcement in nine of the past 12 years, but Weiss believes this time may prove different as investors have higher confidence in the durability of growth at Microsoft and an increase in the dividend yield above 2% would likely attract more income-oriented investors. Furthermore, the analyst said he sees a higher probability of an above average dividend raise in September, noting that an increase of over 20% constitutes a raise larger than "normal" and would allow the dividend yield to return to above 2% despite strong stock performance over the last year. Moreover, Weiss noted that he does not think that returning additional capital to shareholders will limit growth in any way -- through acquisitions, CapEx, or investments in sales, marketing, or research and development -- given Microsoft's cash position and strong free cash flow generation looking forward. The analyst has an Overweight rating and $130 price target on Microsoft shares. PRICE ACTION: In morning trading, shares of Microsoft have gained about 0.5% to $113.48. "Before the Move" is The Fly's recurring series of exclusive stories that identify potentially market moving events, along with analyst predictions, ahead of the news.

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