Microsoft Investors May Eat Dividend and Have Price, Too

As Microsoft(MSFT Quote) prepares to spread a little preholiday cheer next month -- the distribution on Dec. 2 of a massive $3-a-share special dividend worth $32 billion -- shareholders are debating whether the stock will drop an instant $3 to reflect the lower level of cash on the company's balance sheet.

In theory, when a company transfers part of its assets to shareholders in a dividend, its stock price declines by the amount of the dividend on the ex-dividend date (Nov. 15 in this case), as Microsoft noted in its filings with the Securities and Exchange Commission. "For shareholders, any stock price decline is offset by the cash they receive in the form of the dividend," Microsoft explained.

The trouble is, a perfectly efficient market "ain't what we got," noted Charlie Di Bona, an analyst at Sanford C. Bernstein. Instead, some investors are valuing Microsoft on a price-to-earnings ratio, or a multiple of net income. And Microsoft already lowered its outlook for earnings this year to reflect the drop in investment income resulting from shedding $32 billion -- the largest special dividend in the history of the Standard & Poor's 500 index. ...