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Technology > Tech Biz
Microsoft's $33B holiday gift
Investors may use money from the special payout to buy more shares. And that would be a smart move.
November 30, 2004: 2:16 PM EST
By Paul R. La Monica, CNN/Money senior writer

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NEW YORK (CNN/Money) - It's fun to imagine Johnny Gasparini, the impish paperboy from "Better Off Dead," relentlessly hounding Bill Gates shouting, "I want my two dollars!"

Over the years, after all, Microsoft gave little of the money it piled up back to shareholders.

But Thursday Microsoft is doling out a one-time dividend of $3 a share to those who held the stock as of Nov. 15. (Johnny would be happy with the extra dollar, I'm sure.)

Partly because of excitement about this payout, shares of Microsoft have started to show some signs of life. The stock has gained 11 percent since the market's mid-August lows.

Yet, the share price is still stuck below $30. The last time Microsoft (Research) closed above that level (adjusted for stock splits and the one-time dividend) was nearly three years ago.

But Microsoft fans might not have to wait much longer.

For the near term, several analysts are optimistic that a large percentage of the cash investors get from the payout will be plowed back into Microsoft's stock.

Dividend $ may flow back to MSFT

And there's a lot of money at stake. The cost of Microsoft's one-time dividend is a whopping $32.6 billion.

Wall Street does Windows
Microsoft is beating the market this year after being a major laggard in 2003.
 2003 Price change 2004 YTD Price Change* 
Microsoft 6.8% 9.3% 
Dow  25.3% 0.2% 
S&P 500 26.4% 6.0% 
Nasdaq 50.0% 5.2% 
 * through 11/29/04
 Sources:  Thomson/Baseline, BigCharts

"In one fell swoop, nearly $33 billion is getting rotated out of equity into cash and I do believe a good portion of that will find its way back into Microsoft," said David Hilal, an analyst with Friedman Billings Ramsey.

Institutions and mutual funds own 64 percent of Microsoft's available shares outstanding, according to Vickers Stock Research. And for mutual fund managers, there's not much incentive to sit on cash in a market that's suddenly gaining momentum.

Still, that could just provide a short-term pop for Microsoft. What about the future?

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Microsoft has had a rough couple of years because there was little excitement about its product lineup. That is changing.

Drake Johnstone, an analyst with Davenport & Co., says that with Longhorn, the next version of its Windows operating system, due out in 2006, investors will probably bid up the stock late next year.

"All of a sudden, earnings could be growing close to the low teens again, and that will excite investors," said Johnstone.

Analysts expect earnings to increase by 11 percent in the fiscal year that ends in June 2006.

Conservative estimates, compelling valuation

And estimates may be too low, said Brendan Barnicle, an analyst with Pacific Crest Securities. He thinks Microsoft's emerging businesses, most notably the MSN Internet division and home entertainment (i.e. Xbox) have the potential to add up to another 15 percent to fiscal 2006 earnings.

"These are billion dollar businesses that are just marginally profitable now. As profits continue to ramp up, they could contribute to Microsoft's bottom line in a meaningful way," said Barnicle.

Tech Biz
Microsoft Corporation
By Paul R. La Monica

What about valuation though? Is the stock attractive? Yes. Microsoft is trading at 21 times estimates for fiscal 2005. With a projected long-term earnings growth rate of 11 percent a year, Hilal thinks that's a great bargain.

"For a company with great profitability and a near monopoly, it would certainly not be unheard of to pay two to three times the growth rate. So paying 25 times earnings for one of the strongest technology companies with an awesome franchise is fair," said Hilal.

A forward multiple of 25 would give Microsoft a stock price of $31.25, about 16 percent higher than current levels.

Even one of the more bearish Microsoft analysts concedes that the future looks promising.

Richard Williams, an analyst with Garban Institutional Equities, argues that Microsoft no longer deserves a premium tech-stock valuation since it has joined the club of more stodgy dividend payers.

But he adds that Microsoft should continue to gain ground in the lucrative market of selling software to big businesses and that this could lead to huge revenue opportunities.

"We see tremendous market acceptance when Microsoft's next big enterprise software product comes out. And when you look at the sheer numbers, it's arguably as big a market as the original Windows market," said Williams.

It looks like Microsoft might finally be ready to return to a role of market leader.

Pacific Crest's Barnicle owns shares of Microsoft but his firm does not do investment banking for the company. None of the other analysts quoted in this story own shares of Microsoft and their firms have no banking relationships with the company.

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