Microsoft Investors May Eat Dividend and Have Price, Too

In addition, the stock may avoid falling a full $3 because many investors believe the cash is better in their wallet and not in Microsoft's. "Some people might say, 'Well, good, that means Microsoft can't waste the money on an acquisition that might not be so good,'" said David Merkel, a senior investment analyst with Hovde Capital and columnist for RealMoney.com. "So it might actually make Microsoft's stock price go up a little bit." (Merkel's firm does not hold Microsoft shares.)

"Cash is worth more in my hand [than the company's hands] almost always," Merkel added.

Indeed, some investors may ultimately plough the cash they receive from the special dividend right back into Microsoft stock, which could also result in the stock recapturing lost ground. "I might as well just reinvest [the dividend] in Microsoft," said one Philadelphia-area fund manager who holds Microsoft shares.

The fund manager, who asked to remain anonymous, noted that a decline in the share price would reduce his Microsoft holdings as a percentage of his portfolio. So to rebalance his portfolio, he'll likely buy more Microsoft shares, he said.

The experience of other companies that have paid out significant one-time dividends also suggests that Microsoft shares will drop less than $3 after the ex-dividend and may enjoy a modest run-up heading into the ex-dividend date, noted UBS analyst Heather Bellini. Microsoft shares have been virtually flat since Oct. 1, while the Nasdaq has edged up 2.2%, and the Goldman Sachs Software Index has enjoyed a 7% climb.

In a review of five other companies that offered special one-time dividends in the past year, Bellini found that their stocks gained an average of 2% during the 30 days before the ex-dividend date and rose an average of 1% during the one week before that date. On the ex-dividend date, the stocks on average fell by less than the dividend amount, or 81% of the payout.

Other One-Time Dividends
Company	Ex-date	Dividend payout	Stock price drop on ex date	Stock price gain 1 week pre-ex date	Stock price gain 1 month pre-ex date	Stock price gain 1 week post ex date	Stock price gain 1 month post ex date	Stock price gain 3 months post ex date
Barra	12/4/2003	$1.00	$0.76	1%	-4%	-6%	-1%	-10%
Anixter	3/12/2004	1.50	0.59	-3	-5	-2	2	7
Electro Rent	1/15/2004	4.00	4.12	2	7	-8	-4	3
MGM	5/18/2004	8.00	7.94	-1	16	-1	1	-6
BlockBuster	8/25/2004	5.00	4.34	5	-3	-7	-11	N/A
Average				1%	2%	-5%	-3%	-1%
Source: UBS

"The run could ... be due to potential arbitrage opportunities offered by the trading patterns of such stocks on the ex-date," Bellini wrote. "We would not be surprised to see a slight run-up in MSFT going into the ex-date for its one-time dividend."

After the ex-date, all the companies Bellini tracked traded down -- by an average of 2% the day after the ex-date, 5% one week after, 3% one month after and 1% three months later. The declines in all cases except one, however, were lower than the amount of the special dividend.