Forget the Fed, Look at Microsoft!

Forget the Fed, Look at Microsoft!

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

As the first day of the Fed's two-day September policy meeting draws to an end, U.S. stocks edged yet higher. The S&P 500 rose 0.4% to close within three-tenths of a percentage point of its August 2 all-time nominal high. The index has now risen on 10 of 11 trading days this month!

The narrower, price-weighted Dow Jones Industrial Average could only muster a 0.2% gain, while the technology-heavy Nasdaq Composite Index was up 0.7% to a finish at a 13-year high.

Despite these impressive statistics, the CBOE Volatility Index rose again today, to close at 14.53 -- the VIX, Wall Street's "fear index," is calculated from S&P 500 option prices and reflects investor expectations for stock market volatility over the coming 30 days. I don't think it's absurd to think the VIX has found a "natural bottom" around 14, and it's difficult to imagine the index declining the day before we find out whether or not the Fed will now begin to curtail its massive monthly bond purchases (i.e., its so-called "quantitative easing" or QE program.)

Still, does the date on which the Fed starts its "taper" of QE matter to ordinary investors? Seemingly not, if we go by the results of a poll conducted by Reuters/ Ipsos, according to which barely more than a quarter of American adults (27%) were able to select the right definition of quantitative easing from among five choices.

That isn't a problem, at least inasmuch as investing is concerned. As I wrote yesterday, it's a little-repeated truth that "the parlor games of handicapping the next Fed chair or the path of quantitative easing have very little to do with the business of investing." Cue today's fundamentally oriented story:

Microsoft gives back
Software... err, "devices and services" company Microsoft surprised investors today by announcing a 22% hike in its dividend and a $40 billion share repurchase authorization. Annualizing the raised $0.28 per share dividend would put the dividend yield at 3.4%, a very respectable number with the S&P 500 yielding only 2%.

The size of the increase suggests that the Redmond, Wash., company is making a goodwill gesture toward activist investor ValueAct Capital Management. Both parties recently struck a "cooperation agreement" that calls for regular meetings between ValueAct's president, G. Mason Morfit, and Microsoft's board and management and gives Morfit the option to join the board.

That deal was announced only a week after the company said CEO Steve Ballmer would step down and be replaced within a year.

With more than $60 billion in net cash on its balance sheet at the end June, a hefty increase in the dividend seems like a no-brainer -- it's easily covered by Microsoft's operating cash flows. And at its current valuation -- just 12 times estimated earnings per share -- share buybacks are likely to boost, rather than destroy, intrinsic value (this has not always been the case of Microsoft's investments and acquisitions).

With the right incentives, Microsoft is making some smart decision on behalf of shareholders. The case technology analyst and longtime Microsoft watcher Rick Sherlund made for the stock a few short weeks ago now looks increasingly prescient.

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Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned; you can follow him on LinkedIn. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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