Why Apple Should Never Pay a Dividend – Ever

Stop the whining already! If you want to complain about how Apple spends its money, why don't you make $70 billion and have it sitting in your bank account first.

Read the full post here at Forbes.

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Microsoft Might Finally Use Its Cash

By Eric Jackson09/15/10 - 08:00 AM EDT

Late Monday afternoon, a Bloomberg article appeared quoting an unnamed source suggesting that Microsoft(MSFT) would look to tap the debt markets and use the money to fund a higher dividend and do more stock buybacks. The stock ended up more than 5% in the last hour of trading. For Microsoft, that's a monster move.

The company has come under increased shareholder pressure to disgorge its ample cash to shareholders. Last month, I filed a shareholder resolution to be voted on this November at the shareholders' meeting calling on Microsoft to dramatically increase its payout ratio on its regular dividend, as well as considering stock buybacks.

Last week, Microsoft CFO Peter Klein spoke at theCiti(C) Tech conference and got an earful frominvestors in the Q&A about the dividend and cap structure. Klein and Microsoft Investor Relations GM Bill Koefoed also spoke last week to many Microsoft holders, including me, about their views on these questions.

Although I can't disclose what they said during our meeting, here is a summary of my argument to them:

Microsoft is greatly under-appreciated by investors today at current levels. Yet, the company can take its greatest weakness (the perception that it has all this excess cash because it is not growing as quickly as its younger, nimbler rivals) and turn it into its greatest strength (by using its cash to payout a dividend that gets yield-hungry investors to sit up and realize that holding Microsoft is safer than U.S. Treasuries).

There is constant reference in the media these days for "the hunt for yield" by investors, but Microsoft is never mentioned even though it is best positioned to take advantage of this secular trend.

Every pension fund in America today has promised its pensioners it will deliver 8% annual returns forever. They are having trouble in the last three years meeting that commitment. They -- and other large and small investors -- would beat a path to Microsoft's door if there was a substantial increase in the regular dividend.

The status quo for Microsoft of stock buybacks and marginal annual increases to the regular dividend (which returned $16 billion in cash to shareholders last year) isn't working given thestock price. Microsoft needs to be bold.

There are 3 levers that Microsoft can and should pull to get investors' attention in the coming weeks:

1. Most important, in my view, is to substantially increase the regular dividend. I believe it should be nothing less than a doubling of the dividend. Investors would be happy to sit and wait for the market to better see the value in the stock if they were getting a whopping payout. A large increase in the payout would also assuage investor fears that Microsoft might do a large, ill-advised acquisition (like Yahoo!(YHOO) or Research in Motion(RIMM)) which would waste shareholders' money on declining assets.

Although some in the media have raised the question about how wise it is to increase the dividend with the uncertainty of the dividend tax rate, I asserted that I thought this issue was irrelevant. Even assuming the rate goes up, that argues even more for why a drastic increase in the payout is necessary just to tread water.

2. Tapping the debt markets. Johnson & Johnson(JNJ) recently raised $1.1 billion in the debt markets selling 10- and 30-year notes at record low rates. JNJ paid 2.95% on their 10-year notes. In May 2009, Microsoft made its first foray into the debt markets, selling $3.75 billion. Back then, Microsoft paid 4.2% on their 10-year notes.

Why not raise the cash at these levels, especially when Microsoft is seen as more creditworthy than the U.S. government and is one of only a handful of AAA corporate issuers. I reminded Klein that I'd written an article prior to their first debt offering where I pointed out that Microsoft could issue $60 billion in debt and only match IBM's (IBM) current debt-to-cash ratio.

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

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Microsoft Gets an Earful From Investors

By Eric Jackson
RealMoney Contributor
9/9/2010 5:02 PM EDT
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Last month, I filed a resolution with Microsoft (MSFT - commentary - Trade Now) to bring to a vote at the planned November shareholder meeting the issue of dividend policy. I am in favor of a drastic increase in Microsoft's regular quarterly dividend (perhaps along with additional stock buybacks) -- on the order of doubling it. The company could easily support such an increase out of its operating cash flow, and doing so would attract new buyers and raise the stock price.

During this past week, many other Microsoft holders have apparently been saying the same thing -- directly to Microsoft CFO Peter Klein.

Klein, along with Microsoft head of investor relations Bill Koefoed, was in New York this week to present at the Citigroup Technology Conference. He took time during his visit to stop in and chat with many institutional investors in the city. According to Klein's comments at the conference, the dividend issue was front and center in those discussions.

What's more, it appears as though the company's board is seriously considering the issues of an increased dividend, more buybacks and tapping the debt markets when money is so cheaply available.

In my resolution, I suggested strongly that Microsoft double the regular dividend. Klein's comments on this point and other related thoughts are laid out below.

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Question: I'm curious about how high a payout ratio pro forma you'd be comfortable with. It could be the thing that really puts focus back on the stock in terms of all these other levers. If the yield is outside, or perceived to be outside, it just will drive the common price up. So, that analysis was, I think, about a 50% payout ratio. And you're around 25% now. So, is there any color you could give us about how comfortable you are in moving toward 50%?

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[*** This post is an excerpt of the full article, available by clicking here to go to RealMoney.com. Note: subscription required. ***]

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Too Much Cash on Hand

By Eric Jackson
RealMoney Contributor
8/31/2010 7:45 AM EDT
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I've been asked by several people over the past week what I think of the battle going on for 3Par (PAR -commentary - Trade Now) between Dell (DELL - commentary - Trade Now) and Hewlett-Packard (HPQ -commentary - Trade Now). I'm convinced that it's a great thing for 3Par shareholders and equally convinced it will be a bust for the shareholders of the company that wins 3Par. Even for the losing shareholders, the whole battle is likely a sign of trouble ahead for their company.

Let's face it: A month ago, few of us knew that 3Par existed. I remember the company from a decade ago doing data storage up in Seattle. That was about it. I didn't even know it was still around -- let alone that the company would be so sought after.

Most of the market was in my camp, which is why the stock was trading around $10. In the days after Dell's $18 bid for 3Par, there were snickers about the steep price they were paying -- a whopping 80% premium, which made Intel's(INTC - commentary - Trade Now) recent take-out of McAfee (MFE - commentary - Trade Now) at a 60% premium seem like a bargain.

That 80% premium for 3Par has turned into a 200% premium with HP's most recent bid. Most of us don't know too many 200% bids, so we have no basis for comparison. We do know, however, that most 50%-plus premium acquisitions end up destroying value at the acquiring firm.

I don't know 3Par's product offering in depth, but it seems clear that Dell is motivated to do the deal in order to beef up its storage offering to compete with International Business Machines (IBM - commentary -Trade Now), EMC Corporation (EMC - commentary - Trade Now) and Hewlett-Packard, while HP is trying to keep Dell on the outside looking in.

Some have said that 3Par is a "pimple" for both HP and Dell, meaning that the company is so small that it doesn't matter that each is paying so much. That's really not true. They've both got 3Par up to a $2 billion market cap, giving it a cool 236x enterprise value-to-EBITDA ratio. That's not insignificant for a $90 billion HP and a much smaller $23 billion Dell. Also, remember that HP has only $14 billion of cash and Dell has $12 billion of cash. 3Par will be meaningfully dilutive to whichever company wins.

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[*** This post is an excerpt of the full article, available by clicking here to go to RealMoney.com. Note: subscription required. ***]

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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.

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

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Show Us the Money!

By Eric Jackson
RealMoney Contributor
7/16/2010 7:30 AM EDT
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On Monday, I was on CNBC's Fast Money, talking about a problem afflicting most of large-cap US stocks today -- chronic cash retention on their balance sheets. Excluding financials, U.S. public companies now have $1.6 trillion in cash sitting on their balance sheets, according to The Economist estimates. Now, the CEOs of these companies would argue that they need this cash as a potential cushion against the next downturn. After all, companies like General Growth (GGP) went bankrupt in the aftermath of Lehman Brothers' failure because they didn't have enough cash and were at the mercy of creditors who wouldn't roll over its debt as it matured.

However, that argument doesn't hold water if shareholders are saying, "keep your debt at zero, but reduce some of your cash hoard to pay us a better dividend". After all, it is the shareholders' money. Management has the right to run the company in such a way as to maximize its long-term value, but shareholders have the right to complain when they see management running it inefficiently.

Let's talk specifically here. Microsoft (MSFT -commentary - Trade Now) has $37 billion in cash and $22 billion in annual operating cash flow. It currently pays out a forward 2.1% dividend yield, costing it $4.5 billion a year. It could easily double that yield out of cash flow, paying $1 a share annually versus $0.52 currently. It would commit to paying that dividend going forward, giving shareholders a reason to continue holding the stock. (When it paid a $3 special dividend a few years ago, what was the incentive for shareholders to continue holding the stock after getting their money?)

I imagine that Microsoft (and many other tech companies that also cling to cash) would respond to this argument by saying that it is operating in a highly dynamic competitive environment. It is competing against Apple(AAPL - commentary - Trade Now), Google(GOOG - commentary - Trade Now),Salesforce.com (CRM - commentary - Trade Now) and Research in Motion (RIMM -commentary - Trade Now) across multiple businesses. Last year alone, Microsoft spent $9 billion on R&D to try and stay competitive. Doesn't it need its cash to fund these important research activities?

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Microsoft Should Stop Acting Like a "Cougar" & Start Paying a Fat Dividend

Yesterday, I was on CNBC's Fast Money discussing why Microsoft (MSFT) should stop acting like a "cougar" pretending it's still a growth company and start paying a fatter dividend:

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