Drip Portfolio Microsoft: Give Us a Dividend!

Now that most of its antitrust troubles are behind it, Microsoft's investors are clamoring for a dividend payout. Considering the software giant has more than enough cash to meet ongoing legal obligations, and that it's never shown an aptitude for investing that cash, the shareholders have a point.

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By Rex Moore (TMF Orangeblood)
November 7, 2002

Make no mistake, dividend-paying stocks are back in vogue. You need look no farther than this website (The Power of Dividend Growth, Dividends: Your Safe Haven?), or even this column (Dividends Defy Gravity, Five Stocks That Pay), to see that.

There are a couple of reasons for this resurgence in popularity. First, the bear market's blows have been at least partially softened for investors holding such stocks. Second, as stock prices fell, dividend yields -- the annual dividend amount in dollars, divided by share price -- rose. With yet another Fed rate cut yesterday putting downward pressure on interest-paying investments like bonds and CDs, the yield on stocks looks even more attractive.

And that provides background for what turned out to be a very interesting Microsoft (Nasdaq: MSFT) shareholders meeting in Bellevue, Wash. on Tuesday. Flush with excitement after a favorable court judgment in its antitrust case, company executives were greeted with... pleas for a dividend. Sure, there was some back-patting for successfully steering the company through years of legal wrangling. But mostly investors were wondering if they'd finally get a piece of that $40 billion pile o' cash sitting in a mayonnaise jar on Bill Gates' desk.

(The Associated Press said shareholders "clamored" for dividend payments. I love to use "clamor," though it's the sort of word that loses all meaning if you repeat it over and over. Go ahead, try it. Just make sure you're alone.)

One of the catalysts for the clamor is Microsoft's stock price, which is down nearly 40% in the last three years. Obviously, a dividend would have somewhat mitigated the pain.

One fellow, Peter Schroeder, owns 33,000 shares of the company. He reportedly drew applause when he stood up and said, "I don't think the management at Microsoft -- although it's been doing an excellent job with software -- has done a very good job with this cash."

At this point, Gates and CEO Steve Ballmer presumably stopped playing their video game and looked up. Schroeder continued: "Would you consider some kind of disbursement to shareholders?"

Chief Financial Officer John Connors answered that there are still no plans for a dividend. The reason, he said, is that "it would not be appropriate to commit to a long-term program like a dividend" while the software giant faces "significant legal issues."

Those are disheartening words to shareholders, because Microsoft is always going to face significant legal issues. The European Union still has antitrust concerns of its own, for example, and Sun Microsystems (Nasdaq: SUNW), is seeking $1 billion in damages because it claims Microsoft has impeded its Java software platform.

Heck, Ballmer has made so many enemies he'll likely be sued if he tries helping a little old lady cross the street, and Gates could face a class action suit for emotional damages caused by looking at his haircut.

Besides, we're talking about $40 billion here. Does Microsoft really need this much to fight litigation? That's enough money to buy 100 lawyers a brand new Porsche 911 every week for 10 years, pay a court settlement of $5 billion, and still have $31 billion left over. I don't know about you, but I think the company can handle a dividend payment. (I also think Gates himself could cover it with the spare change in his sofa.)

There are certainly valid reasons for a company to not pay a dividend. For instance, it's painful to see earnings taxed twice: once when the business pays at the corporate tax rate of 35% or so, and then again when the shareholder claims the dividend as income. There's a possibility Congress may ease that ridiculous policy, but don't count on it.

Also, it would be counterproductive to pay a dividend if a firm can make better use of the cash elsewhere. Young companies, in particular, plow earnings back into their business to support growth. Microsoft, of course, is no longer a young company in hyper-growth phase. Yes, it still needs lots of cash for various acquisitions and expansions and R&D, but it has plenty for these purposes.

Another possible good use of cash is to invest it. Unfortunately, Mr. Softy's management team has not been nearly as good in this respect as it has been in developing and selling software. Last year, it was forced to take a $3.9 billion charge to cover its losses in telecom and cable companies. It invested in such losers as USInternetworking, Teligent, Winstar Communications, and Lernout & Hauspie. Each went bankrupt.

This is what Mr. Schroeder was referring to when he said the company has not "done a very good job with this cash."

So, let's sum things up here. Microsoft has more than enough cash to handle ongoing legal challenges, and management has proven to be less than savvy at investing in other companies. Therefore, I will list what I see as all the better uses for its excess cash, other than paying a dividend:

1. Give it to me.

Since Mr. Schroeder probably won't like that option, I hereby throw all my support behind his proposal. Give us shareholders -- the owners of the company -- some of our $40 billion.

Rex Moore readily admits his haircut is not any better. At press time, he owned shares of Microsoft. All of his holdings can be found here; the Fool's disclosure policy is here.

Drip Portfolio

  Ticker Company Price
 Daily Price
 % Change
  MEL MELLON FINL CORP (1.42) (4.83%) 27.98 
  PEP PEPSICO, INC. (0.05) (0.11%) 43.48 
  JNJ JOHNSON & JOHNSON (0.38) (0.63%) 59.89 
  INTC INTEL CORPORATION (0.71) (3.71%) 18.44 
  PAYX PAYCHEX INC (1.03) (3.71%) 26.76 
  Trade Date # Shares Ticker Cost/Share Price  Total % Ret  
 10/07/98 46.6655 MEL 35.00 27.98  -19.31%
 07/28/00 15.2182 PEP 45.57 43.48  -2.48%
 11/14/97 39.403 JNJ 42.32 59.89  42.80%
 09/08/97 59.9456 INTC 25.10 18.44  -25.79%
 02/05/02 10.275 PAYX 34.06 26.76  -21.44%
  Trade Date # Shares Ticker Total Cost Current Value  Total Gain  
 10/07/98 46.6655 MEL 1,633.06 1,305.70  -327.35 
 07/28/00 15.2182 PEP 693.53 661.70  -31.83 
 11/14/97 39.403 JNJ 1,667.59 2,359.85  692.29 
 09/08/97 59.9456 INTC 1,504.68 1,105.41  -399.27 
 02/05/02 10.275 PAYX 350.02 274.96  -75.06 

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