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Microsoft's Cash Strategy Revealed

Contributed by mm | July 20, 2004 7:40 PM PST

Microsoft finally revealed how it plans to make more sense of its warchest. Today, Microsoft announced that it will return up to $75 billion to shareholders in the next four years in three ways.

Normal Dividend: Microsoft will double its current dividend of 16 cents per year to 8 cents per quarter. At $3.5 billion per year, this amounts to $14 billion for four years.

Stock Buyback: Microsoft plans to spend up to $30 billion in the next four years to repurchase its stocks.

One-Time Dividend: Upon shareholder approval of related employee compensation changes, Microsoft will pay a one-time $3/share dividend in December, returning $30 billion to shareholders. (To make whole for Microsoft employees whose income also relies on stock option and stock award programs, Microsoft will adjust the number of options, strike price and number of stock awards upon shareholder approval.)

Back in April, I speculated that "the best use of Microsoft cash will be a mix of increasing buyback plus a small dividend increase, which represents the best balance between shareholder and employee interests." In the same post, I was concerned about the fact that a big dividend without adjustment to compensation plans will be a pure negative for employees. Apparently I underestimated management's willingness and flexibility to orchestrate a fair plan for both sharebholders and employees, and they deserve a praise for taking the extra time to engineer compensation plan changes.

Some additional comments:

- Management Flexibility Is Preserved: Only the one-time dividend portion of the plan is paid out immediately, which means by 2004 year end, Microsoft can still retain around $30 billion in cash. If Microsoft is in need of cash anytime in the next few years, management can decelerate or stop stock buyback to gather more cash.

- Positive Initial Feedback from the Market: Stock market welcomed the news by sending MSFT to $29.91 apiece in the after-market, a 5.6% jump over today's close price.

- Announced Stock Buyback Is Not An Increase from Status Quo: Microsoft bought back $6-7 billion worth of stocks in any of the last three fiscal years, so the announced $30 billion/4 year schedule is not an increase at all.

- One-Time Dividend Is A Qualified Dividend: In the accompanying FAQ, Microsoft claims this one-time dividend will be treated as qualified dividend for tax purposes. This means it will be taxed at 5% or 15% for most investors (unless one only holds MSFT for a short while surrounding the ex-dividend date).

- Windfall for Bill Gates and Other Execs: Bill Gates and Steve Ballmer stand to get big from the plan. WSJ reported Bill will donate the $3.35 billion he expects to receive from the one-time dividend to his private foundation, which will make it one of the largest donations in the US. CEO Steve Ballmer will receive $1.23 billion from the 411 million shares he owns.

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