Monday, November 11, 2013

Dividend Compass Cup Final - Microsoft v Baxter

We started with 16 companies, and here we are at the Dividend Compass Cup Final. Among the sixteen were some of the all time great dividend payers like Procter & Gamble, McDonald's, Coca Cola, and IBM. But now we are down to two. Its not a surprise that the two companies left standing represent very attractive industry sectors - software and pharmaceuticals. Both of these industries feature robust profit margins, healthcare and pharma has been paying out dividends for a long time, and now tech is joining the party too.

In fact, one of our finalists, Microsoft was one of the bell cows paving the way for tech giants like Cisco and Apple to institute shareholder friendly dividend policies. It goes to show you that Sherlock Holmes was on to something when he said "There is nothing more deceptive than an obvious fact"; back in the dotcom days tech companies were derided as overpriced, unprofitable and unfriendly to shareholders. yet, Microsoft is here in the Dividend Compass Cup final with an excellent dividend track record.

The Dividend Compass Cup rules are straightforward, we run the two quality, wide moat companies through the Dividend Compass to analyze which is the more interesting investing candidate. Todd Wenning's Dividend Compass scores them 1-5.

Microsoft initiated its dividend in 2003 at $0.24/share. Since then its grown 4x over the decade to a $1.12/share forward yield. Granted they started off a low base, but as Sherlock Holmes reminds us, Microsoft is one of the stealth dividend stories of the past decade. And the Dividend Compass shows the stealth dividend story has room to run.

Microsoft metrics
Microsoft delivers on every Dividend Compass category. We've known for decades that software was mega profitable, but Microsoft led the way for its tech peers - turning those profits into dividend income for its shareholders.

Microsoft scores

If we went back a decade and told a group of investors that tech dividends would be a major factor in 2013, I suspect we would have been laughed at. Not so with pharma and healthcare. Dividends have been a big part of that sector for decades.

Over the least decade, Baxter grew its dividend +10% annually, from $0.58/share in 2003 to a forward yield of $1.96/share today. Baxter first paid a dividend in 1980, at that time the PC industry was a curiosity, not the global force it is today. Baxter is a  dividend powerhouse.

Baxter metrics
Baxter is nothing but Good to Excellent from the Dividend Compass point of view.  Its only slip up is the recent FCF coverage issue. Other than that, Baxter is raining perfect 5s.

Baxter score

Baxter has a stellar record, a very strong five year average, but Microsoft is playing a whole different game. Steve Ballmer is retiring, but he can always look back and know that through all the struggles, the Zune, heated competition, mobile, Apple, and all the rest, he closed out his career bringing home the Dividend Compass Cup.

Game, Set, Match Winner: Microsoft.

1 comment:

  1. Congrats to Microsoft! Thanks for putting this together, Gunnar. Now that MSFT is yielding 3%, it's going to be hard for investors to ignore double-digit annual dividend growth.