Microsoft Now a Momentum Play?

Investors are grabbing shares this week as the stock climbs out of a months-long range.
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Finally, investors may be coming around to

Microsoft

(MSFT) - Get Report

.

For the second day in a row, the tech behemoth has been by far the volume leader in

Nasdaq

trading, apparently propelled by dividend rumors and follow-through from the company's analyst day last week.

Shares of Microsoft recently gained 31 cents, or 1.2%, to $27.12 after jumping 3.4% on Tuesday. The rise, though not enormous, is notable given that the stock hasn't touched the $27 mark since mid-December and has been stuck in a tight trading range for months.

"The sentiment should start to turn" on Microsoft, said Rich Parower, co-portfolio manager of the Seligman Global Technology Fund, who suggested that a positive article in

Barron's

this week could be helping to lift the shares.

That article noted Microsoft's

bullish tone at its annual analyst day meeting last week, when the company touted its menu of new products expected to start selling this fall. A little momentum may have been created, Parower said, prompting investors to jump into Microsoft over fear they may be left behind if it finally moves.

Additionally, "people are starting to talk about them raising the dividend," added Parower, whose fund holds Microsoft shares. A higher dividend, he noted, could bring in another fresh set of investors. In a sense, Microsoft has been caught in investor limbo -- no longer the growth story it once was, not attractive enough for value investors and not paying a high-enough dividend for income-oriented investors.

But talk has been swirling that Microsoft will announce either a dividend increase or another special dividend following its board meeting sometime this month. Despite Microsoft's record-breaking $33 billion special dividend last year, the company still ended the quarter with $37.8 billion in cash and short-term investments on its books.

But Goldman Sachs software analyst Rick Sherlund said he told clients Tuesday not to bet on another special dividend. The company did it once, but it's not their style to do it again, he said. Still, Sherlund does believe that Microsoft is due for an increase to its regular dividend. He has an outperform rating on Microsoft, and his firm has done investment banking with the company.

Sherlund has suggested the company should double its dividend to bring up its yield from its current 1.2% to 1.8%, in line with the average dividend of the

S&P 500

.

Tony Ursillo, an analyst with Loomis, Sayles & Co., agreed that another special dividend is "ridiculous." And he doubts Microsoft would double its dividend, given its current cash flow.

Ursillo notes the company already is paying out about $3.5 billion a year in dividends, has committed to an average $7.5 billion in stock repurchases and has a capital expenditure budget of about $1 billion -- all totaling $12 billion. Subtract that from the $16 billion to $17 billion a year Microsoft generates in cash and it's left with only about $4.5 billion -- too low to pay out another $3.5 billion if the dividend is doubled.

Instead, Ursillo said he believes the stock is simply playing catch-up. Before its gain Tuesday, he noted, Microsoft was up only 7% since its April low, trailing the 14% gain in tech stocks overall.

But Ursillo argued that investors buying now ultimately will become impatient with Microsoft, which he calls a "2007 story." That's when the company will start to see stronger results from the release of Windows Vista, the next version of its operating system, which is expected to hit store shelves in the second half of 2006.

"It's too early to buy it if you're betting on the second half of calendar '06," said Ursillo, whose firm holds Microsoft shares.