Updated from July 20Microsoft ( MSFT) is finally sharing its wealth. Responding to longstanding shareholder pressure, the company's board of directors approved a plan Tuesday to double the software giant's regular dividend, buy back up to $30 billion in stock over the next four years and issue a special one-time dividend of $3 a share. Shares of Microsoft were 75 cents, or 2.7%, to $29.07 Wednesday morning. Analysts hailed the move by Microsoft as "bold" and positive for the stock. "While we might quibble with some of the details and forms of the distribution, we expect that the aggregate amount will appeal to investors and that most investors will find something of which to approve," Sanford C. Bernstein analyst Charlie Di Bona wrote in a note Wednesday. "In general, we expect this announcement will be constructive for the stock." (Di Bona has an outperform rating on Microsoft and his firm doesn't do investment banking.) Microsoft now will pay an annual dividend of 32 cents, with the additional 16 cents representing $1.73 billion a year of new money for shareholders. The boost raises Microsoft's dividend yield to 1.12% based on Tuesday's closing stock price. The quarterly dividend is payable Sept. 14 to shareholders of record on Aug. 25, 2004. The special dividend will be payable Dec. 2 to shareholders of record Nov. 17. The dividend yield still falls short of the S&P 500 yield of 1.7%, but Microsoft management left open the possibility that the board could approve additional increases in the future. "The ultimate dividend yield should be adequate to at least pique the interest of income-oriented investors and retail," Di Bona noted. "We are particularly relieved that management did not ignore this important component of their overall cash allocation planning." All told, including the $32 billion special dividend, the buyback and the higher payout, Microsoft will return up to $75 billion to shareholders over four years. "We looked at a broad range of scenarios and thought that the decision we reached is something for everybody," CFO John Connors said on a conference call Tuesday evening. CEO Steve Ballmer said the company believes the three-pronged package makes Microsoft the top U.S. company in terms of delivering capital return to shareholders for the coming four-year period. Even after that, the Redmond, Wash., titan still will have plenty of cash left over. Microsoft currently carries $56 billion of cash on its balance sheet and generated nearly $16 billion in cash flow from operations in fiscal year 2003. In a press release, Microsoft noted its progress in resolving numerous legal issues facing the company, which were oft-cited hurdles toward spending down its cash. The company is still appealing an antitrust suit in Europe but has settled other suits, including those involving rival Sun Microsystems ( SUNW) and consumer class-action cases in numerous states. In addition, Microsoft recently won an appeal to the settlement of its U.S. antitrust case. The company also stressed that the payout will not affect Microsoft's commitment to research and development. The timing of the announcement Tuesday was certainly a surprise, given that Microsoft had suggested its upcoming analyst day would be the likely venue for describing plans for its cash stash. But the news still didn't immediately help Microsoft's stock break the $30 mark, a ceiling that the stock has been unable to jump since last September. That may be because investors had been chattering about the possibilities for Microsoft spending down its cash for months and a $30 billion stock buyback was widely viewed as one likely scenario. Investors have been complaining about Microsoft's bloated balance sheet for years, urging the company to distribute the money to shareholders rather than earning paltry returns on it.
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.