Microsoft Opens Its Wallet

Besides the timing, the other surprise was the one-time dividend, which some had speculated Microsoft would see as a reward for short-term investors and consequently avoid.

"The $3-a-share, or $32 billion, of cash deployment is above my expectations," Transamerica Investment Management fund manager Chris Bonavico said. "It's an efficient way to distribute and immediately Return capital to shareholders."

Bonavico called Microsoft's overall plan "fantastic." "This is clearly very good because there's a huge asset base that was earning below its cost of capital," he said. Reducing that base makes the remaining asset "much more attractive," added Bonavico, whose firm holds Microsoft shares.

Piper Jaffray analyst Gene Munster agreed that the magnitude of the special one-time dividend was "uncharacteristic" of financially conservative Microsoft, but called the overall news "a shocker."

The announcement, Munster acknowledged, adds more fuel to the question that has become a thorn in Microsoft's side: Is the world's largest software maker still a growth company?

Ballmer answered that question on the conference call, saying in Typically hyperbolic terms: "I'm confident we have some of the greatest dollar-growth prospects in front of us of any company in the world."

Munster, however, took a slightly more tempered view. "Their business is just as healthy as it's ever been [but] the reality is people have known for a long time Microsoft doesn't have the same growth prospects they did several years ago" simply because its numbers have become so large, he said. (Munster has an outperform rating on the stock and his firm hasn't done banking with Microsoft.)

It may take the company's fourth-quarter earnings results Thursday to push the stock above $30, Munster said. He's expecting slight upside to his $8.9 billion revenue estimate, positive comments about the PC market and none of the comments other software vendors have been making about weakness in the enterprise market.

Microsoft also will discuss the impact of the spending plan on earnings Thursday. One obvious area that will be affected is investment income.

In a note Wednesday, Goldman Sachs analyst Rick Sherlund estimated the package will result in a hit of 5 cents a share to earnings in fiscal year 2005, which began this month, and 7 cents a share in fiscal 2006. Sherlund noted that Microsoft's stock may not drop by $3 to reflect the one-time dividend, as is typically the case, because investors had previously discounted the cash. (Sherlund has an outperform rating on Microsoft and his firm has done banking with the company.)

Microsoft has previously bought back about $6 billion a year in stock. The $30 billion buyback announced Tuesday includes that $6 billion, meaning Microsoft is increasing its buyback by only about $1.5 billion a year, assuming Microsoft divides the $30 billion evenly each year.

Based on the current stock price, Microsoft will buy back about 1 billion shares, or about 9% of shares outstanding, although that will be offset by additional stock grants.

The one-time dividend, meanwhile, will bring Microsoft's cash balance to about $24 billion -- a level that Connors indicated is "not unreasonable" in the future. On top of that, Microsoft still has about $15 billion of strategic investments on its balance sheet.

"This plan gives us plenty of flexibility to add to those strategic investments as we see best," Chairman and Chief Software Architect Bill Gates said. Microsoft management declined to detail any new plans for those investments on the conference call Tuesday.

The special one-time dividend is subject to shareholder approval of amendments to employee stock plans at the company's annual meeting Nov. 9.

Those amendments, already approved by the Microsoft board, are designed to protect employees as the share price declines due to the one-time special dividend. They basically would allow Microsoft to issue more options, change the strike price on options, and issue more stock to ensure the options and stock are worth the same amount after the one-time dividend is paid out, CEO Steve Ballmer explained.

If shareholders don't approve those changes this fall, the special dividend would not be made and the board and management would consider other alternatives, the company said.

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