Opening Windows
Microsoft to Dole Out Its Cash Hoard
Huge Payout to Investors Signals Mature Future For the Software Giant
Timing Avoids Possible Tax Hit

July 21, 2004; Page A1

In an extraordinary move to shower its cash hoard upon shareholders, Microsoft Corp. said it will make a one-time dividend payment this year of $32 billion and buy back up to $30 billion of the company's stock over the next four years. The company also said it will double the dividend it pays out annually to $3.5 billion, or 32 cents a share.

The plans, which Microsoft valued at up to $75 billion over four years, are believed to represent the largest corporate cash disbursement in history. They mark a turning point for high technology's most successful company.

Microsoft, with a share price that has been nearly flat for six years, faces increasingly impatient calls by some investors to share some of the company's stockpile of nearly $60 billion in cash and short-term investments. That money comes from Microsoft's lucrative Windows monopoly in personal-computer software, but antitrust issues have limited its ability to make big acquisitions.

With growth slowing, Microsoft is signaling its evolution from hot stock to mature corporation. It has been successively transforming relationships with competitors, customers and its employees. Over the past year, it has mended fences with some of its staunchest rivals including Sun Microsystems Inc., resolved most of the long-running antitrust suits against it, instituted new policies for taking in customer feedback and killed its stock options in favor of another stock-based compensation preferred by slower growth companies.

Now the focus is on shareholders, a change symbolized by the expansion of its dividend, which could fundamentally alter the makeup of Microsoft's investor base over time. Once the choice of "growth" investors, Microsoft is seeking to broaden its shareholder base to investors looking for a place to park their money that's lower-risk and pays regular dividend income -- a step closer to a modern version of a "widows and orphans" stock symbolized by the AT&T Corp. of another era.

Microsoft has "taken a variety of moves in recent years to recognize the reality that growth for them, or for the industry as a whole, will be relatively more normal and not the hypergrowth of the '80s and '90s," said Stanford economist Michael Boskin.

The $32 billion one-time dividend payment, which comes to $3 for each share of Microsoft stock, could be a measurable stimulus to the U.S. economy -- and is expected to arrive just in time for holiday shopping. Excluding institutions such as mutual funds, and officers and directors such as Chairman Bill Gates, individuals own roughly 30% of Microsoft's shares, and will receive roughly $9 billion from the special dividend. By comparison, the expanded child credit in last year's tax-cut bill delivered $14 billion to U.S. families.

Mr. Gates will be the largest single beneficiary, receiving a one-time payment of more than $3 billion. Mr. Gates, who has already created a $27 billion endowment at the Bill and Melinda Gates Foundation through past stock donations, also plans to donate the proceeds from the dividend to the organization over an unspecified period of time. (See related article) Steve Ballmer, the company's chief executive officer, would receive $1.2 billion, based on stock holdings Microsoft reported last September.

The Microsoft announcement reinforces the case that President Bush and his allies made when they persuaded Congress to cut the tax rate on dividends to a maximum of 15% in 2003, down sharply from the maximum 35% tax rate affluent shareholders would pay on ordinary income. Their argument was, in part, that the tax load encouraged companies to hoard cash instead of paying profits to shareholders so they could invest in more promising enterprises.

By making the dividend payable in December, the move ensures that recipients will pay the lower tax rate. Sen. John Kerry, Mr. Bush's presumed opponent, has proposed repealing all of Mr. Bush's tax cuts for people with incomes above $200,000, including the lower tax rate on dividends.

Advocates of Mr. Bush's dividend plan argued that the U.S. effectively taxes companies' earnings twice -- once through the corporate income tax and again through the individual income tax, when the money is paid out as a dividend to shareholders. Mr. Bush wanted to eliminate the shareholder-level tax on dividends but in the end could only win a sharp reduction in the rate.

Lawrence Lindsey, the president's former top economic adviser, was quick to suggest Microsoft's move wouldn't have happened without the new tax policy. "The tax change the president put through to end the double taxation of dividends was responsible for it," Mr. Lindsey says.

Jason Furman, Mr. Kerry's economic policy director, disputed the idea that the dividend-tax cut has increased productive investment by companies. "Dividend-paying stocks have not out-performed nondividend stocks and much of the increase in dividend payouts has been by a few closely held companies," he argues. "The 1990s established a proven model for increasing investment: cutting the budget deficit and establishing sound economic fundamentals."


Microsoft's special one-time dividend of $3 per share will shower cash on big shareholders.


William H. Gates

Steven A. Balmer

Jeffrey S. Raikes

Jon A. Shirley

James E. Allchin


Fidelity Mgmt. & Research

Barclays Global Investors

SSgA Funds Management

Vanguard Group*

Alliance Capital Management
*Report date as of 6/30/04

Sources: the company; FactSet Research Systems

For Microsoft officials, the payout plan is a recognition that their business has changed. For most of its history, revenue grew simply as more people joined the personal-computer revolution. Each system they bought came with Microsoft's Windows operating system and its Office suite of application programs.

The PC market continues to grow but at a slower rate that is increasingly driven by replacement purchases. Corporations have shifted to regular annual fees for software upgrades. Microsoft is now plowing much of its research and development into newer markets, such as search engines and consumer gadgets for the living room.

Microsoft officials have acknowledged that the company's massive hoard was becoming a burden. Indeed, company executives have said it would have made a distribution sooner had they not been worried about the possibility of big antitrust judgments, a fear that has eased due to a recent appeals-court ruling.

But they vow not to slow investments in new technology and expressed confidence in their business. "When we look out over the next several years I'm confident we have some of the greatest dollar growth prospects in front of us of any company in the world. Full stop. Period," Mr. Ballmer said in a conference call with reporters and analysts.

Despite the huge one-time payout and buyback plan, Microsoft will still hold a staggering amount of cash. After accounting for the new plan, Goldman Sachs analyst Rick Sherlund estimates Microsoft will have about $24 billion in cash reserves. It meanwhile holds about $15 billion in other investments that could be easily liquidated.

The retention of those reserves could be a sign that Microsoft is eyeing some acquisitions, analysts and investors said after the announcement. Tight corporate technology spending combined with a growing desire by companies to buy technology from single suppliers are helping drive a consolidation of the software industry. Oracle Corp. is trying to win regulatory approval for a bid for rival PeopleSoft Inc..

Microsoft last month disclosed that it had held merger talks with Germany's SAP, the world's third-largest software company, raising speculation that the company would keep some cash on hand in case talks restarted.

"The only need for the cash would be for some strategic large investment," says Mr. Sherlund.


The top institutional investors in Microsoft, according to FactSet Research:

Fidelity Management: 431,890,234 shares
Barclays Global: 377,512,096 shares
SSqA Funds: 269,491,948 shares
Vanguard Group: 225,230,907 shares
Alliance Capital: 173,267,492 shares

In Silicon Valley, some rivals said Microsoft's move was tantamount to giving up on the idea that it can invest its cash more wisely than shareholders. "At the end of the day, you have to ask yourself, can you personally invest $70 billion better than your stockholders," says Jonathan Schwartz, Sun's president and chief operating officer. "I think Steve Ballmer did not think so."

John Connors, Microsoft's chief financial officer, says it will give a forecast of the impact of the changes on its earnings tomorrow when the company announces financial results for the year ended June 30.

Investors reacted warmly to the news, sending Microsoft shares up 5.7%, or $1.61, to $29.93 in after-hours trading, their highest level since last September. In 4 p.m. trading on the Nasdaq Stock Market, Microsoft shares rose 37 cents, to $28.32.

But the one-time bump to Microsoft's shares doesn't necessarily head off turbulence ahead. Microsoft will pay out the special dividend to shareholders who hold the stock on Nov. 17. On Nov. 18, the stock will go ex-dividend, meaning that shareholders who buy that day will not be entitled to the dividend.

Typically, when a stock goes ex-dividend it will fall by the amount of the dividend payout. Microsoft's stock could fall by more than the $3 dividend payout, because many investors who bought shares in anticipation of the special dividend will exit the stock, says Brett Gallagher, head of U.S. equities for money manager Julius Baer.

Mr. Gallagher says that because most of the money he manages is for offshore clients, who are subject to a 30% withholding tax on dividends, he will likely sell his Microsoft shares before the ex-dividend date. Many foreign investors will likely do the same, he believes.

The $30 billion buyback is by far the largest ever announced by a U.S. company, according to Charles Plohn Jr., a managing director for special-equity transactions at Merrill Lynch, who has been tracking such announcements since 1986. Microsoft has long been aggressively repurchasing its shares, to offset dilution caused by issuing stock options, without a big announcement. In the past four fiscal years, Microsoft has repurchased roughly $22 billion of its own shares, according to company filings with the Securities and Exchange Commission.


Microsoft CFO John Connors says the software giant had to clear several legal hurdles before announcing the one-time dividend .


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With Microsoft's stock-option program now ended and the new plan to repurchase up to $7.5 billion in shares a year for the next four years, analysts say the number of its shares outstanding will likely shrink by about 2% a year.

The one-time dividend, meanwhile, is an easy way to pass on cash to shareholders. But many investors agree that a one-time payment will do little for the share price long term, because it doesn't provide any continuing benefit to earnings. It could also reduce earnings in the current year since Microsoft wouldn't be earning interest income on the cash.

"In my opinion that doesn't do anything for anybody," says Marc Klee, portfolio manager at John Hancock Technology Fund. "I would rather have seen them buy back more shares more quickly than do the special dividend."

Raising the annual dividend is more significant. Microsoft, along with many technology companies, grew without paying dividends, as shareholders were content to forgo the regular income for the promise of a rising share price. But with Microsoft stock price effectively flat since 1998, there's been growing pressure on management to start payouts. It declared its first dividend last year and then doubled it eight months later. That dividend -- which represented just $1.7 billion of Microsoft's annual $12 billion cash flow -- failed to impress investors.

"We'll be paying out over $3.5 billion a year in just normal dividends that makes us one of the largest companies in terms of absolute payout," Microsoft's Mr. Connors says. "Depending upon how our business performs the board would decide if we could increase that over time."

The dividend also could make Microsoft more attractive to more income-oriented funds and many individual investors. That increased demand for the stock could bolster it over the long-term, analysts say. "The wider appeal Microsoft has, the better all shareholders will be," says Paul Cook, director of technology investing at Munder Capital Management.

Brad Ruderman, head of Ruderman Capital Partners, termed the dividend and buyback a "bullish" move. But he also suggested that it may be partly designed to raise the morale of employees, who no longer hold lucrative stock options and have also suffered under the company's stagnant share price.

Microsoft said the changes will force it to adjust its employee stock plans, which otherwise would shrink in value when the company pays the one-time dividend in December. That dividend requires shareholder approval and is expected to be considered at the annual shareholders meeting on Nov. 9. Assuming they approve, the dividend will be paid on Dec. 2 to shareholders of record on Nov. 17. The quarterly dividend will be payable on Sept. 14 to shareholders of record Aug. 25. Mr. Connors said he expects Microsoft's board to review the annual dividend following the close of this fiscal year, which ends June 30, 2005.

The number of big U.S. companies paying dividends increased last year, after a two-decade decline, according to Standard & Poor's. S&P equity market analyst Howard Silverblatt said 376 companies in S&P's 500-stock index now pay dividends, up from 351 at the end of 2002.

In dollar terms, Microsoft's $32 billion dividend is the highest ever, S&P said.

At yesterday's 4 p.m. price of $28.32, Microsoft's new eight-cent quarterly dividend -- excluding the $3 one-time payout -- represents a dividend yield of 1.1%. That's considerably below the 1.7% median dividend yield for the 376 companies in the Standard & Poor's 500-stock index that pay a dividend, according to S&P. But the $3.5 billion payout on 10 billion shares outstanding will nevertheless be the tenth-biggest annual dividend payout by a U.S. company, Mr. Silverblatt said.

While no other company has as big a cash pile, other U.S. companies could soon face similar issues. The 500 companies in the S&P index now hold roughly $555 billion in cash, more than twice the $260 billion they held at the end of 1999.

Other companies holding significant amounts of cash include Exxon Mobil Corp. with $15.9 billion, Hewlett-Packard Co. with $15 billion, Pfizer Inc. with $14 billion, and Intel Corp. with $13 billion. Others with smaller cash totals also have significant resources. Cisco Systems Inc., for example, reported $3.9 billion in cash as of May 1 but holds an additional $15 billion in liquid investments.

-- Justin Lahart and John McKinnon contributed to this article.

Write to Robert A. Guth at and Scott Thurm at