Is Microsoft's 2.80% Dividend Attractive When Intel is Yielding over 3.80%?

Among the various technology giants, Microsoft Corporation (MSFT) provides a high dividend yield given the historic stability of the yield and the high rating of the company’s debt. As of the end of June 2011, with MSFT trading at $26 a share, the estimated dividend yield is about 2.8%, higher than peers such as IBM and Oracle. And although Intel Corporation’s (INTC) dividend yield of 3.8% might appear more attractive, a relative analysis of the two stocks shows why MSFT and INTC might appeal to investors with different risk appetites.

The higher dividend of INTC is accompanied with higher volatility in the dividend yield of the stock compared to that of MSFT. Since 2006, the yield on MSFT has been fairly stable above 2.25% due to the lower volatility of the stock, whereas INTC’s yield has ranged from 1.7% to 4%. This, combined with the fact that MSFT’s credit rating matches that of the US government debt, makes for a good low risk investment that does not demand investors' frequent attention.

The financial statements of the two companies tell a mixed story. Both companies have capital of around $52 billion although INTC’s capital structure is not as debt heavy. Its $2 billion of debt is less than half that of MSFT's. At the end of q1 2011, INTC had a debt ratio of 0.27 and a leverage ratio of 0.34 both of which compares favorably to 0.46 and 0.86 of MSFT.

But MSFT offsets the high debt ratios with better profitability ratios. It has a profit margin of 31.85% as opposed to 24.6% of INTC. It also has a higher return on common equity (43.96%) than that of INTC (27%). And although Microsoft’s incoming cash flows had been negative during 2009-2010, it had a net positive cash flow of $3 billion last quarter. MSFT had around $7 billion in cash on its balance sheet as of Q1 2011, $3 billion more than INTC. It also has a much more of its capital in short term investments (worth $43 billion).

To sum up, Microsoft is a good place to park your funds if you are a low-risk investor who does not have time to actively manage your portfolio and seeking a stable and sustained return of about 2.80%.

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