News Releases

Microsoft Corp. Announces $62 Billion Cash Distribution
Investment Implications

Geneva, July 21st, 2004: A few thoughts on MSFT:

The plan is big. Management will distribute $62 billion in cash to shareholders over the next four years. That is a lot of money. Of the companies making up the S&P 500 equity index, only 15, or 3%, currently generate annual sales of over $60 billion!
Roughly half the distribution will be in the form of a $3.00 special dividend payable December 2, 2004. The other half will be in stock repurchases. The company plans to use $7.5 billion per year over the next four years for this purpose. On top of all this, the company will double its ordinary dividend raising the yield to 1.1%. I think the yield will continue to rise.
The move is very shareholder friendly. Most of Wall Street was encouraging the company to use excess cash to buy shares. Mgmt chose instead to favor dividends, both special and ordinary. Long-term investors prefer greater and growing dividends.
Management also signaled likely dividend increases in the future. I currently estimate the dividend will increase at a 17% average annual rate causing it to double in five years. Though, this estimate could be conservative as management has already doubled the dividend twice in the past 18 months.
The special dividend is a bit of a mixed bag. Investors will get $3.00 for each share they own. That's the good news. The bad news is the share price of the stock could fall close to $3.00 after the distribution is made, at least theoretically. That is because most dividend discount models would have already considered the $5.25 in cash on the balance sheet to determine the value of the company's equity. My view is I don't think the stock price will fall the full $3.00. I think the marginal investors will be attracted to the well above average potential future dividend growth rate. My expectation is for the share to drop closer to $2.50 after the distribution, so current holders will get about a $0.50 benefit.
There is still a lot of cash left, nearly $40 billion. That is more than enough to make acquisitions, pay legal bills and spend on research and development.
Dividend increases are usually a good sign of things to come. Look for a good Q tomorrow.

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