You'd think the record $32 billion special dividend

Microsoft

(MSFT) - Get Report

is paying out Thursday, along with a $30 billion share repurchase plan and higher regular dividend, would be enough to satisfy shareholders.

For the time being, yes. But longer term, no.

Unless the software giant does even more with its cash and strategic investments, it may end up facing yet more investors who are grumbling about Microsoft's balance sheet as those assets edge upward again.

"It's a big first step," Sanford C. Bernstein analyst Charlie Di Bona said of Microsoft's

three-pronged strategy for sharing its cash, first announced this summer. But "I would argue there should be either more

stock repurchases or increasing the annual dividend." (Di Bona has an outperform rating on Microsoft, and his firm doesn't do investment banking; its parent, Alliance Capital, holds Microsoft shares.)

Other analysts and investors echoed that sentiment, adding acquisitions to the list of ways Microsoft should use its cash.

"I do think they will have too much cash," said David Hilal, an analyst with Friedman Ramsey Billings. "They still generate over a billion

dollars a month."

Microsoft is currently sitting on a whopping $76.6 billion in cash, short-term investments, equity and other investments. Of that, about $64.4 billion is in cash and short-term investments, while $12.2 billion is in equity and other investments, primarily made up of fixed-income securities.

The total should fall to a still-staggering $46.6 billion by the end of the year after Microsoft pays out its $3-a-share special dividend today -- the largest ever by a company -- and pays a recently raised 8-cents-a-share quarterly dividend, and buys back stock, according to estimates by Goldman Sachs analyst Rick Sherlund. (Sherlund has an outperform rating on Microsoft, and his firm has done banking with the company.)

But because Microsoft's Windows and Office franchises are such cash cows, the company's stash of cash plus investments will again cross the $50 billion mark by June 2006, the end of its 2006 fiscal year, Sherlund estimated.

The Cost of Capital

However, some analysts and investors say Microsoft will most likely avoid that run-up "problem" by upping its dividend regularly. Chris Bonavico, a fund manager at Transamerica Investment Management, expects the company to raise the dividend once a year. "They get it, obviously," Bonavico said. "They understand cash does not earn your cost of capital."

"Microsoft's cost of capital is somewhere around 10% and cash is earning 2% after tax. That's actually destroying value," added Bonavico, whose firm holds Microsoft shares.

Hilal noted that Microsoft is currently paying out a dividend yield of about 1.2% -- yet its cash flow yield is north of 4%, and the average dividend yield of the

Dow Jones Industrial Average

stocks is more than 2%.

"So the point is there's clearly room to raise the core dividend from cash flow and still actually grow their balance sheet -- if that is one of their goals," Hilal said. "They're one of the more profitable companies in the Dow 30, so you could argue, 'Why couldn't they pay a 3%-plus yield?'

"Over the longer term, they may get there," added Hilal, who has an outperform rating on Microsoft. (His firm hasn't done banking with Microsoft.)

Less likely in the short term is Microsoft buying back more of its stock beyond the $30 billion, four-year repurchase program, Hilal said. But "at the end of those four years, I'm sure they'll initiate a new stock buyback program," he said.

Chuck Jones, who covers software and hardware for Stein Roe Investment Counsel, believes it will probably be at least a couple of quarters -- if not more than a year -- before Microsoft decides the next step for its large war chest. Regardless of the timing, he can't see Microsoft paying out more than 35% to 40% of its earnings in a dividend. Currently, Microsoft's annual dividend is about 25% of the $1.25 a share consensus estimate for fiscal 2005 earnings, as gathered by Thomson First Call.

"I think you've seen the bulk of the large increases," said Jones, whose firm holds Microsoft shares. He expects the company to boost the dividend a penny or two each quarter per year.

Acquisitions are the other option. Microsoft executives have consistently said they are focusing on small strategic acquisitions, but then the company stunned Wall Street earlier this year when it disclosed that it had held preliminary merger talks with German software behemoth

SAP

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.

Steve Roth, an analyst with the John Hancock Technology fund, said he'd prefer to see Microsoft complete a series of "tuck-in" acquisitions that could help product positioning rather than big software acquisitions, which are notoriously difficult to pull off.

Security for Sale?

Security, which has been Microsoft's weak spot, is one potential area for a shopping spree, investors suggested. The company has kept industry observers guessing about its plans for Romanian antivirus software maker GeCAD Software, acquired last year, and rumors of Microsoft looking at

McAfee

(MFE)

have swirled for months, if not years.

But McAfee's business customers could jump ship if Microsoft bought the company, Roth said, because those customers want another layer of security from an outside company on top of their Microsoft software.

Snapping up another video-game maker would be less complicated. Buying a gamemaker that can produce titles exclusively for Microsoft's Xbox game console would boost Xbox sales and help Microsoft's quest to move from the home office to the living room, Roth said. That plan worked well when Microsoft acquired Bungie Software, maker of the blockbuster

Halo

title, in 2000.

But these days, buying a Japanese game studio would make sense because Xbox sales have been dismally low in Japan compared with rival

Sony's

(SNE) - Get Report

PlayStation 2, Di Bona noted.

Overall, however, Di Bona and others noted that Microsoft has so much cash that any acquisition is unlikely to make a dent on its balance sheet.

Which raises the point: Just how much cash does Microsoft need? Both Bonavico and Hilal put the number at $20 billion. Other than using cash for acquisitions, Bonavico believes that Microsoft needs a cushion for legal fees and for plowing money into new fields and technologies -- as it has done to build a new search engine to compete against

Google

(GOOG) - Get Report

.

Jones suggested that investors would look for Microsoft to buy back stock if its cash balance was more than $30 billion, whereas they'd likely raise a few questions about a balance between $10 billion and $20 billion, and remain mum on a balance under $10 billion.

After all, Microsoft "could distribute all the cash they've got and even take on some debt -- $10 billion in debt -- and pay that off in a year with the cash flow they generate," Jones noted.

But, of course, Microsoft would never do that.