My Personal Finance Journey

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MSFT Reaching 52-Week High. Now What?

Contributed by mm | November 11, 2004 9:06 PM PST

The stock of Microsoft (MSFT) is sporting a good run these days. At one point of time today, MSFT was trading hands at $30.08 a pop, topping the 52-week high of $30.00. What's in it for me?

First thing first, I am happy to see my stock option grants are appreciating in value almost every day. Since the start of November, the balance of my stock option account has increased by $7,000. Not nearly a big sum to make a happy retirement, but it is a good boost to my net worth anyway. Hopefully, if MSFT can hold on to the current price level, I can report a surprising spike in net worth by month end.

Now, the current price does pose a couple of important questions:

First, with a $3 special dividend about to be paid out (ex-dividend date is next Monday), does the current price change anything in the tax consequences and thus make MSFT a good investment?

The answer is no. Unless MSFT tops $30.80 tomorrow, and one buys into it at that price, the tax consequences are still the same: the special dividend is a qualified dividend that is subject to up to 15% dividend tax (if stock is held for more than 61 days), but any capital loss will automatically be classified as long-term capital loss.

Even one buys MSFT at $30.81 or higher tomorrow, the prospect for any tax arbitrage is bleak. For people at 25% tax bracket, one will pay 15% dividend tax on the $3 special dividend, and can claim $3/share capital loss for short-term capital loss (worth 25% tax deduction up to certain limit and subject to certain limitations). The best case: an $30.81 investment can turn in a tax benefit of $3 * (25% - 15%) = $0.30 in 61 days, or about 1%. However, the shareholder is subject to MSFT price fluctuation in the 61 days holding period and it is hard to say MSFT will not turn south by 1% or more.

The second question is a specific decision I need to make: I have a batch of stock option grants back in 1998 at the strike price of $26.8125 (after splits) that will expire by July 2005. Shall I take advantage of the current price and sell it now, or try my luck by holding on, hoping MSFT to set another high?

I don't have a clear answer for this question. Still, I want to take a chance to wait till the special dividend is issued and number of shares is adjusted upwards in conjunction with strike price being lowered. Very likely, I would like to sell before the end of the year to take a gain -- after all, my marginal tax rate next year will be higher than that of this year.

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