Microsoft (MSFT) Downgrade Weighs On Market; Goldman Sachs Calls for 5% Dividend Yield

The biggest ratings move on Wall Street today was Goldman Sachs' downgrade of Microsoft (Nasdaq: MSFT), which triggered a 2.3 percent sell-off in the stock. The downgrade is not only newsworthy for Microsoft shareholders, but for the entire market, since Microsoft is both a Dow 30 stock and a major component of the Nasdaq 100 (4.3%).

Goldman Sachs downgraded the stock from Buy to Neutral, arguing a change in course in needed to unlock value. The firm also cut its price target from $32 to $28.

Goldman said a "call to action" is in order to unlock value. One way to unlock value would be a "materially increased dividend" over an above the recent 23% increase, the firm believes. They said Microsoft should move itself into the top 20 dividend-paying companies in the S&P 500 in terms of dividend yield. A 5% dividend yield from Microsoft would be "attention-grabbing" and rank the company in the top 20 dividend-yielders in the S&P500, from the current 79th place.

Another call to action would be a "coherent consumer strategy" which could include cutting investments and/or divesting assets such as gaming. A third call to action would be "market leadership in cloud".

The firm also has increased caution on the more elongated PC refresh cycle and the new threat from cannibalization of notebooks from tablet, where Microsoft is not yet involved.

Goldman lowered FY11 EPS from $2.39 to $2.30, FY12 from $2.73 to $2.65 and FY13 from $3.02 to $2.90.

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