Microsoft to announce dividend increase

What's Happening

Tech titan Microsoft ( MSFT ) is likely to announce a dividend increase this week. Currently, the stock offers a 2.1% yield, and the company has a 13-year streak of dividend increases. The stock has been steadily trending higher over the last year, and is currently up 18.7% on the year.

Technical Analysis

MSFT was recently trading at $74.28, down $0.68 from its 12-month high and $18.67 above its 12-month low. Technical indicators for MSFT are bullish with a strong upward trend. The stock has recent support above $72.05 and recent resistance below $74.40. Of the 22 analysts who cover the stock, 16 rate it a "strong buy", four rate it a "hold", one rates it a "sell", and one rates it a "strong sell". The stock receives S&P Capital IQ's 3 STARS "Hold" ranking.

Analyst's Thoughts

Microsoft has been doing a good job growing its business in recent years. The company came under fire for not taking advantage of the rise in mobile computing, but it has done a good job bringing bulls back into the stock due to its growing presence in cloud computing. The company has embraced the new platform, and its strong enterprise legacy has allowed it to significantly grow its Azure cloud services. Earnings are forecast to rise 10.2% per year over the next five years, which should keep the stock moving in the right direction. MSFT has a relatively low 48.8% payout ratio, so it can easily afford another dividend increase, which based on historical timing could be coming this week. With the stock already yielding 2.1%, I would not look for a huge increase, but an increase is definitely coming. Last year the company boosted its quarterly distribution by 8.3%, and this year's increase should fall roughly in line with that. Look for the quarterly payment to rise from $0.39 to around $0.42, for a 7.7% rise. Expect the announcement this week, with the stock trading ex-dividend mid-November.

Stock Only Trade

If you're looking to establish a long stock position in MSFT, consider buying the stock under $74.25. Sell if it falls below $66.85 or take profits if it gets to $85.50.

Bullish Trade

If you want to set up a bullish hedged trade on MSFT, consider a December 60/65 bull-put credit spread for a 30-cent credit. That's a potential 6.4% return (23.8% annualized*) and the stock would have to fall 12.1% to cause a problem.

Bearish Trade

If you want to take a bearish stance on the stock at this time, consider a December 82.50/85 bear-call credit spread for a 20-cent credit. That's a potential 8.7% return (32.4% annualized*) and the stock would have to rise 11.3% to cause a problem.

Covered Call Trade

If you like the stock, but wish to lower your cost basis on a new position, you may want to consider a December $75.00 covered call. Buy MSFT shares (typically 100 shares, scale as appropriate), while selling the December $75.00 call for a debit of $71.75 per share. The trade has a target assigned return of 4.5%, and a target annualized return of 16.9% (for comparison purposes only).

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