SAN FRANCISCO -- By raising its dividend Monday, Microsoft (MSFT) - Get Report tried to flag down investors looking for a good stock pick.

Microsoft boosted its quarterly dividend by 2 cents a share to 13 cents -- double its typical once-a-year boost of a penny.

The dividend hike is part of a two-pronged way to return money to investors and lure back those disenchanted with a stock that has fallen by one-third in the past 10 months. The Redmond, Wash., company also authorized $40 billion in stock repurchases over the next five years.

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Microsoft recently completed a previous $40 billion buyback program, making it "a natural time for the board to approve the new authorization," a company spokesman said in an email.

The moves helped to boost the stock nearly 3% in recent trading to $25.90. $1.03, or 4.1%, to $26.19 in recent trading, or 14 times trailing 12-month earnings.

A P/E ratio of 14 lags the sector. Application software companies have an average ratio of nearly 20. Competitor

Oracle

(ORCL) - Get Report

trades at 16 times recent earnings.

Microsoft executives are no doubt nostalgic for the days when the stock traded above $35 -- in November 2007 -- following two consecutive quarters of marked outperformance.

With the turmoil in the markets, Microsoft may think its business is not being valued fairly, says Allan Krans, an analyst with Technology Business Research.

"They are trying to get more money back to shareholders," says Krans. "They haven't been successful doing it through capital gains."

The stock is sitting at its 2000 price, despite Microsoft's status as a "cash-rich business" with enviable growth, he says.

Microsoft generated $21.6 billion in operating cash flow in fiscal 2008, which ended in June. The company had cash, equivalents and short-term investments of $23.7 billion.

"Microsoft has long been committed to returning capital to its shareholders, as can be seen by the over $115 billion in dividends and share repurchases they have returned over the last five years," the Microsoft spokesman said.

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In November 2004, Microsoft made a special $3-a-share dividend. Since then, the normal dividend rate has been raised annually.

Once introduced quarterly, an increase in the dividend is difficult to take back. The 2-penny increase is an implied promise to investors that Microsoft can deliver comparable revenue and earnings growth in future years.

"Dividends tend to be sticky," Krans says. "I believe they are planning on maintaining it for quite some time."

Although delivering higher growth in recent years, Microsoft stock suffers from the perception that its Windows and Office packaged-software franchises will lose traction as users start to adopt from free software available over the Web from

Google

(GOOG) - Get Report

and others.

While Microsoft has outlined an online services and software strategy, much of the program is in the investment or launch phases. And investors question the strategy's ability to replace revenue from the core businesses.

"People are still looking for Microsoft to come up with a plan for the company's future that's going to ensure they'll keep generating the type of cash they have been," Krans says. "They haven't proven to the market that those are going to be viable growth options for the next decade."

A key strategy in growing the online business is building on its search-advertising capability. Microsoft recently introduced the Cashback program to lure consumers searching for products online. After Microsoft's bid for

Yahoo!

(YHOO)

failed earlier this year, the Cashback program was put into action as the first step in a backup plan for the online business that also involves acquisitions.

Directing some of Microsoft's cash toward the share-buyback program does not preclude a deal in which Microsoft would acquire some of Yahoo!'s assets, although Microsoft has said repeatedly it has dropped that objective.

Yet hope lives on among Yahoo! investors. On Friday, new Yahoo! board member Carl Icahn publicly promoted the idea of a deal that would merge the two companies' search or advertising businesses.

Microsoft's core business "continues to throw off a large amount of cash" that could allow the company to make large investments, says Krans. Buying some of Yahoo!'s assets is "always a possibility, particularly with new board membership" pushing for it.