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Updated to reflect afterhours action, spokesperson detail.

NEW YORK (

TheStreet

) --

Microsoft

(MSFT) - Get Microsoft Corporation Report

hasn't even raised its dividend yet and already the yield is getting squeezed.

Shares of the Redmond, Wash.-based software giant finished up 5.3% on Monday at $25.11 as the chatter about potential plans to return cash to shareholders picked up steam with a media report saying the company was looking to sell debt to support a higher quarterly payout and ramp up repurchase activity. An analyst quoted in the story estimated Microsoft could sell as much as $5 billion in debt without impacting its current bond ratings.

The stock was easily the biggest percentage gainer within the

Dow Jones Industrial Average

, which

continued its September rally

and rose for a fourth straight session.

Monday's volume of 113.6 million was a fair run at doubling the issue's trailing three-month daily average of 64.7 million, and good for most active on the Nasdaq exchange, outpacing

Intel

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(INTC) - Get Intel Corporation Report

by more than 40 million shares. The stock continued to churn in extended trading with another 2.9 million shares changing hands, according to

Nasdaq.com

, which last quoted the stock at $25.15, up 4 cents.

A spokesperson for Microsoft wasn't immediately available for comment.

The

Bloomberg

report, which cited a person familiar with the matter,

said Microsoft was going down this road

because too much of the nearly $37 billion in cash on its balance sheet is generated or held outside of the U.S., creating potential tax issues, and to take advantage of the favorable interest-rate environment.

That plan apparently sounds pretty good to investors, who have seen Microsoft's share price decline 22% year-to-date, including a 20% drop through Monday's close since hitting a 52-week high of $31.58 on April 23. The company has been hearing calls for a while to return more cash to investors, and its plans are a hot topic with its board meeting taking place later this month.

Heather Bellini, an analyst with ISI Group, issued a research note on the subject over the weekend. She sees Microsoft's board lifting the quarterly dividend by 4 cents to 17 cents a share as the most likely scenario, citing the precedent in the past for the company to target an earnings payout ratio of around 29%.

Bellini also said she believes Wall Street would like to see Microsoft map out a three-to-five year plan for how it plans to return more of its operating cash flow to investors.

"In our view, this communication would be a positive especially as many in the market are finding it difficult to find a fundamental catalyst as the company's tablet and mobile strategies are still being questioned," she wrote, maintaining a buy rating and 12-month price target of $39 on the stock.

Bellini thinks Microsoft could seek even more debt than the

Bloomberg

article indicated, estimating it could go as high as $10 billion and maintain current bond ratings.

She also theorizes that the company could conceivably handle a doubling of the current quarterly dividend to 26 cents a share, which would likely help its share price in the long run because of the correlation between higher earnings payout ratios and higher stock returns for large caps. Such a dramatic increase isn't considered probable, however, as Microsoft is known for its fiscal conservatism.

"While we think investors would applaud this increase, in our view, a one-time increase to this level could be aggressive as we believe the board would want to manage expectations around future dividend increases," she said.

At its current quarterly payout level, Microsoft's stock has an annual yield of around 2.2%. The company is expected to report its fiscal first-quarter results on Oct. 22. The average estimate of analysts polled by

Thomson Reuters

is for earnings of 55 cents a share in the September period on revenue of $15.86 billion. Microsoft has topped Wall Street's earnings view for six straight quarters.

In its Form 10-K for fiscal 2010, which ended on June 30 for Microsoft, the company said it bought back 380 million common shares during the year, up from 318 million shares in fiscal 2009. As of June 30, Microsoft had $23.7 billion remaining on the $40 billion repurchase authorization its board approved in late September 2008.

--

Written by Michael Baron in New York.

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Michael Baron

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