News > Technology
Microsoft's $10 billion giveaway?
Wall Street debates whether a rumored special dividend is the best use of Microsoft's cash.
July 7, 2003: 2:43 PM EDT
By Paul R. La Monica, CNN/Money Senior Writer

NEW YORK (CNN/Money) - Forget about Pepsi and its paltry "Play for a Billion" game. Rumor has it that Microsoft is considering giving away at least $10 billion of its massive $46 billion cash horde.

According to a report by a sister publication of the Financial Times, Microsoft is said to be mulling a special dividend of more than $10 billion to existing shareholders. A spokeswoman for Microsoft would not comment about the report, which was originally published on Friday when the U.S. markets were closed.

The dividend scuttlebutt helped lift shares of Microsoft (MSFT: Research, Estimates) 3.6 percent in early afternoon trading on Monday. But it is also sparking debate about whether Microsoft, one of the best performing stocks of the 1990s and the world's largest company measured by stock market worth, should still be considered a true growth company.

Microsoft's market value of nearly $295 billion, including Monday's gains, put it a shade of General Electric Co. (GE: Research, Estimates), at about $293 billion.

Signal that growth is slowing?

After all, most technology companies have avoided dividends, preferring instead to reinvest their cash into research and development, share buybacks or acquisitions.

"When growth stocks start paying a dividend it is an indication that there are not a lot of opportunities remaining out there," said Stephen Mergler, vice president of Northstar Capital Management, which runs the Fremont Large Cap Growth fund and owns shares of Microsoft.

Microsoft's stock has lagged this year's explosive tech rally due to concerns about slowing growth in the personal computer market and the threat that free operating system Linux poses to the dominance of Microsoft's Windows. Shares are up just 6.7 percent year-to-date while the Nasdaq has surged 28.3 percent.

Analysts expect earnings for Microsoft's latest fiscal year (which ended in June) to increase 13 percent, but that growth will slow to just 3 percent in fiscal 2004.

That's a far cry from Microsoft's average annual earnings gain of 17 percent over the past five years.

Microsoft already pays a dividend, albeit a small one. The world's largest software company began paying a common dividend of 8 cents a share annually in March, for a yield of only 0.3 percent. A $10 billion pay out would amount to nearly 94 cents a share, or a yield of 3.4 percent.

When Microsoft first announced in January that it would pay a dividend, CFO John Connors referred to it as a "starter dividend." Based on Microsoft's 10.7 billion shares outstanding, the current dividend plan would cost the company only $856 million a year.

Dividend may be the only option

Whether or not the dividend rumor is true, Microsoft still has a ton of cash. What will it do with it all?

The company has a stock buyback program and invests pretty heavily in R&D. And even though consolidation is picking up in the software sector and Microsoft has ample cash to use for deals, it's unlikely that Microsoft will make a bold move since there are lingering concerns about its antitrust settlement with the government.

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"Given the sensitive regulatory position that Microsoft will still be facing, the company will not make a major series of acquisitions, which reduces the need for cash," said Eric Upin, an analyst for Wells Fargo Securities.

Richard Williams, strategist with independent research firm Summit Analytic Partners, said a special one-time dividend could give Microsoft's underperforming stock a short-term boost. But he thinks the shares, trading at nearly 26 times fiscal 2004 estimates, are overvalued given the slowing growth prospects.

"The growth rate is not very impressive," said Williams. "Why pay such an exorbitant multiple on earnings?"

Microsoft is not likely to issue a formal announcement about any change in its dividend plan until either its fiscal fourth quarter and full year report on July 17 or at its analyst meeting on July 24, analysts said.

"This strikes me as a trial balloon," said Williams. "Management may be getting tired of the harping on the dividend so if they give investors a quarter of the cash to shut people up, then the company can get back to business."

But Drake Johnstone, an analyst with Davenport & Co, says that it is more likely that Microsoft will raise its dividend as opposed to issuing a special one-time payment.

Nonetheless, it seems clear that the company is morphing into a more stable and less exciting company. Otherwise, Wall Street probably wouldn't be discussing these rumors seriously in the first place.

"Microsoft is a company that has reached the maturation of its cycle," said Mergler. "That doesn't make it a bad stock but it's just not the growth stock it was in the late 1990s."

Analysts quoted in this story do not own shares of Microsoft and their firms have no investment banking relationship with the company.  Top of page

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