$MSFT · Dividendology · 2026-10-27

Finally, the fifth dividend increase you need to know about is Microsoft. They just announced an 8% increase in dividends , and what a year Microsoft has had. The stock price has been extremely volatile.

They have been trading almost sideways for the past year, but the pullback from the peak has been significant. The stock was trading at around $542, then it dropped as low as $352.

Now, in a short period of time, the stock has risen by 25%. Looking at their performance since the beginning of the year, they have now doubled, with an increase of approximately 10.13% .

We haven't covered Microsoft news for a long time because we were covering it frequently from March to August of this year when the opportunity was very tempting, and in my personal portfolio I actually added more Microsoft shares during that period. But the market has now come to its senses.

But what is interesting is that from a valuation perspective, they are still trading at well below their five-year average price-to-earnings ratio. The stock is currently trading at 26.5 times earnings.

However, the picture is very different if we look at the price-to- free cash flow multiple. In fact, from a profitability-replication perspective , yes, they are cheap. From a price-to- free cash flow perspective, they are at one of the highest valuation levels we have ever seen for the stock.

Why is this the case? Well, it's a very similar story to what we just saw with Texas Instruments. Operating cash flows have expanded significantly, but capital spending has grown at a faster rate.

So, for the first time in a long time, from 2024 to 2025, we actually saw a decrease in free cash flow. This is expected to continue for Microsoft over the next few years.

In fact, when you look at the dividend breakdown sheet, you can see why. Again, the current intensive capital spending is clearly aimed at increasing free cash flow at a much higher rate in the long run.

But Microsoft is one of the few cloud computing stocks that is expected to remain strongly positive in free cash flow . Their peers, such as Meta and Google, have already become negative free cash flow companies .

Therefore, Microsoft is able to continue to return capital to shareholders through growing dividends and increasing payouts at a strong rate.

But it is very likely that in the future they will return to the double-digit dividend growth level of 10% that they have historically achieved. Interestingly, even at current prices, analysts are giving Microsoft stock a roughly 15% upside, meaning the stock price could reach $610 .

If we move on to our sensitivity analysis , let's see what kind of earnings growth is expected. Currently, analysts' average estimate for earnings per share by 2030 is expected to reach $35.19 for Microsoft.

This means a compound annual growth rate for earnings per share of around 20% until 2030. That's an amazing growth in projected earnings.

So, let's assume for a moment that they will actually achieve that. They will meet the average analyst estimates. Again, this data comes directly from Ticker. Then let 's say that the price-to-earnings ratio , although already trading below its historical average, continues to decline.

It may fall as low as 25 based on the past twelve months. You can still see future returns by 2030 and 2031 that outperform historical market averages. You will be faced with double- digit compound returns .

If the price-to-earnings ratio remains roughly at its current level, future returns will of course be very attractive.

Remember that this also does not include the initial dividend yield of approximately 0.7%. Therefore, Microsoft still has room to rise at current prices if capital expenditures pay off well.