Saturday, August 28, 2010

Microsoft Should Raise Its Dividend

By Eric Jackson, Senior Contributor08/25/10 - 06:59 AM EDT

As a long holder of Microsoft(MSFT), I submitted last week a resolution for Microsoft to significantly increase its quarterly dividend.

It's my hope and intent that Microsoft will put this resolution to a free vote of its shareholders at November's shareholder meeting in Seattle. I believe that a vast majority of other Microsoft investors will feel similarly to me on this subject even though I've yet to speak with them.

A copy of the formal resolution sent to Brad Smith, Microsoft's general counsel and corporate secretary, can be found here.

The actual resolution is simple:

RESOLVED, that Microsoft Corporation's shareholders recommend that the board of directors of Microsoft adopt a policy requiring an immediate significant increase in the quarterly paid dividend to shareholders or an equivalent significant increase in annual Microsoft-sponsored purchases of its own stock on the open market.

To back this up, however, I was allowed to provide the following supporting statement:

While all Microsoft shareholders hold a belief that the Company's stock will increase in value over time as the Company increases its operational performance, there has been frustration that the Company's stock price has decreased 55% over 10 years from January 1, 2000 through July 26, 2010. Even with special and quarterly dividends received from the company, over the last 10 years, through July 31, 2010, Microsoft's total shareholder returns are -8.53%. Over the same period, the S&P 500 has returned -7.36% (including dividends).

During the last 10 years, many shareholders have called on the Company to pay a dividend and conduct stock buybacks, given the Company's strong cash position. As of June 30, 2010, the Company had $36.73 billion in cash on its balance sheet, and a trailing twelve months of operating cash flow of $24.07 billion.

Microsoft has initiated a quarterly dividend payment during the last 10 years, commenced doing stock buybacks, and paid a one-time special dividend in 2005.

At a $0.52 per share annual dividend yield, Microsoft is currently paying over $4.5 billion in dividends to shareholders. While that absolute number sounds large, it's actually quite small on a relative basis compared to other S&P 500 companies. Microsoft's forward dividend yield as a percentage of its operating cash flow is 18.7%. The corresponding percentages for Pfizer (PFE), Lorillard (LO), Duke Energy (DUK), and AT&T (T) - who are all among the current list Top 40 companies in the S&P 500 paying the highest dividend yield - were 82.1%, 49.7%, 29.2%, and 28.9% respectively. It's noteworthy that none of these companies has similar cash balances (or unused access to the debt markets) as Microsoft.

We believe that Microsoft could easily double its dividend or spend an equal amount on stock buybacks on an annual basis and still have ample cash flexibility to make strategic acquisitions, ongoing investment in the business through R&D activities, run its normal course of business, and keep an adequate reserve for general business uncertainty.

We believe that a dramatic increase in the forward dividend yield would attract a high degree of interest among large institutional investors such as pension funds who must meet challenging target annual returns for their pensioners. Unlike a special dividend, a commitment to a large forward dividend yield gives Microsoft shareholders a reason to continue holding on to the shares after payout. It also sends a strong message from Microsoft to its shareholders that the company's net profits belong to the shareholders.

We believe that the Company has an enormous strength that is under-appreciated by investors: its enviable cash position, operating cash flow, and access to tap the debt markets. Its market-leading core products and services will continue to provide significant cash to shareholders for many years to come. There are few other potential investments that can compare to Microsoft's cash-generating assets. At the same time, the capital markets are experiencing a high degree of uncertainty at the moment. Many investors will gladly escape that storm to find a welcome port as owner of Microsoft's equity, if the company significantly increases its payout of cash to shareholders through its quarterly dividend and stock buybacks.

The bottom line is that there is unusual uncertainty in the capital markets these days. Investors -- large and small -- are hungry for yield and Microsoft is better positioned to give it to them than any other public company.

When Microsoft started paying a regular dividend, some said that tech companies shouldn't pay dividends. We now know that our technology companies are among the richest and most stable. In many ways, they've supplanted banks as the most trustworthy and safest investment available for "widows and orphans." Returning excess capital to shareholders just makes sense.

Microsoft is better positioned than any other company to pay out a game-changing, large regular dividend. If Microsoft does that, investors will beat a path to the company's door because of the confidence management is displaying in its ability to keep up these payouts in the future, while also carefully reinvesting other excess profits to grow and protect the business.

We'll see in November if other Microsoft shareholders agree with me on this resolution.


[** This post is an excerpt of the full article, which is available on by clicking here. Free Site.**]

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