News > Technology
Microsoft cuts outlook, sets payout
No. 1 software maker had plenty of surprises for Wall Street.
January 17, 2003: 10:48 AM EST
By Paul R. La Monica, CNN/Money Senior Writer

NEW YORK (CNN/Money) - Microsoft shocked Wall Street Thursday by announcing that it would pay a dividend on common stock for the first time ever...but the company also lowered its sales guidance for next quarter and the remainder of this fiscal year.

Shares of Microsoft (MSFT: down $2.72 to $52.63, Research, Estimates) fell 4.7 percent in early morning trading on the news. The stock was the most actively traded on the Nasdaq.

The No. 1 software maker also reported better-than-expected earnings but missed its sales target. The company posted earnings of 47 cents a share and sales of $8.5 billion. Wall Street analysts were expecting 46 cents a share and sales of $8.6 billion for the company's fiscal second quarter. Microsoft posted earnings of 49 cents a share on revenues of $7.7 billion a year earlier.

The company also announced a 2-for-1 stock split.

The annual dividend, equal to 16 cents a share before the split, would amount to a yield of about 0.3 percent based on its current stock price.

Tech outlook still not bright

Microsoft lowered guidance for its fiscal third quarter. The company said it expected sales for the quarter ending in March to be between $7.7 billion and $7.8 billion. Analysts were expecting sales of $8 billion.

"This probably reflects their view of the state of the world in terms of demand," says Bill Batcheller, portfolio manager for National City Investment Management, which owns Microsoft shares. "There isn't any magical pickup happening yet in technology."

Microsoft lifted its earnings guidance slightly, however, saying that it expected to earn 47 or 48 cents a share. Analysts were expecting 47 cents.

For the full fiscal year, Microsoft said it expected revenues to be in the range of $31.9 billion to $32.1 billion, lower than the consensus estimate of $32.5 billion. The company lowered its earnings target as well, saying it expected to earn between $1.90 and $1.93 a share. Analysts were expecting $1.98 a share. The new estimates call for earnings growth of between 4 and 5.5 percent from fiscal 2002.

Eric Upin, an analyst with Wells Fargo Securities, thinks that the lowered guidance is not a huge shock, however, since Microsoft typically sets lower targets than what analysts are predicting. "This is a very conservative company so it's not surprising to see a little sobriety," Upin says. He does not own shares of Microsoft and Wells Fargo does not perform investment banking for the company.

Microsoft's stock has held up better than many of its peers. Even with Friday's drop, the shares are just 25 percent off their 52-week high. And Microsoft continues to have a rich valuation, trading at about 28 times its lowered estimates for this fiscal year.

But during a conference call on Thursday evening, Microsoft Chief Financial Officer John Connors said that the business environment remained "challenging." Connors said that the company is expecting personal computer shipments to increase in the low to mid single digits for the rest of its fiscal year.

"There is not much change in the health of the PC ecosystem. Demand from business customers continued to be challenging. We did not see robust corporate demand," Connors said.

About that dividend

Still, the announcement of the dividend seemed to get as much attention as the earnings. "I was surprised that they came out this soon and announced. It's really just a token one, but there's room for it to increase," said Drake Johnstone, an analyst with Davenport & Co. Johnstone does not own shares of the stock and his firm has no investment banking relationship with Microsoft.

Yield for techs
Microsoft joins a handful of other technology giants that pay dividends.
CompanyDividend yield*
Texas Instruments0.5%
* As of 1/16/03

To that end, Connors said during the conference call that the dividend was just a "starter dividend." He added that the dividend payment will not affect the company's strategy of buying back shares when it sees fit. In the last quarter, Microsoft repurchased 19 million shares, worth about $1 billion.

Microsoft has come under increasing pressure from institutional investors to pay a dividend because of its huge cash hoard, which stood at $43.4 billion as of the end of December, up from $40.5 billion at the end of September. Microsoft's war chest has come under even closer scrutiny since President Bush proposed his economic stimulus plan, which includes a tax cut on dividends.

One hedge fund manager saw Microsoft's decision as a strong signal in favor of Bush's plan.

"I think it really helps the administration's case on this tax cut. It's a real company saying OK, we're responding to government incentive," says Jeff Matthews, head of hedge fund Ram Partners. Matthews has no position in the stock.

Another money manager thought that a dividend payment made a lot of sense for the company regardless of a tax cut. To be sure, the company still faces some ongoing legal challenges stemming from its antitrust settlement with the federal government. Last week, Microsoft agreed to settle class action lawsuits filed by residents of California for $1.1 billion.

But Joe Sirdevan, director of research and portfolio manager for Jarislowsky Fraser Limited, a money management firm based in Toronto that owns approximately 2.5 million shares of Microsoft, said it was getting tougher and tougher for Microsoft to justify such a large pile of cash. "I don't think you could effectively re-deploy that cash into the business. It's too big," says Sirdevan.

Of course, Microsoft Chairman Bill Gates will benefit immensely from a dividend as well. According to the company's latest proxy, filed in November, Gates owned 621 million shares. At 16 cents a share, that's $99.5 million. Gates and Microsoft CEO Steve Ballmer were not on the conference call.  Top of page

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