Shares of software giant Microsoft (Nasdaq: MSFT) plunged, Wednesday, despite the company's attempt to win back confidence of investors by authorizing a sharp 23 percent jump in its quarterly dividend payout.
Microsoft, whose share prices had gone soft over the past few months, said, Tuesday, its board has recommended raising its quarterly dividend by 23 percent to $0.16 per share from $0.13 per share.
With 8.65 billion shares outstanding, Microsoft is set to pay out about $5.5 billion in dividends per year at the new rate.
The Redmond, Washington-based company also said it would issue $6 billion of additional debt. In 2008, Microsoft's board had authorized issuance of $6 billion in debt. The company sold $3.75 billion in long-term corporate bonds, $1.25 billion in convertible bonds and $1 billion in short-term commercial borrowings.
The fund generated from the latest debt sale would be used for paying dividends or buying back stock, Microsoft said. The company still has about $23.7 billion left of the $40 billion share repurchase authorization the board granted two years ago. It plans to borrow to fund dividend payouts and buy back stock because much of its cash holdings are held overseas. Bringing that money home would mean the company would take a tax hit.
"The higher dividend, combined with our ongoing share repurchase program, reflects our commitment to returning capital to our shareholders and our confidence in the long-term growth of the company," said Microsoft CFO Peter Klein in a press release.
The news of the hike in dividend payout made Microsoft shares jump in the market on Tuesday. The company's shares were up by $0.19 in after-hours trading after closing at $25.15 on the Nasdaq.
Market analysts welcomed the announcement, saying Microsoft, which was sitting on a cash pile of $37 billion, made the right move as its stock currently is trading at the same level it was eight years ago. Microsoft shares are down over 17 percent this year, compared to 3.5 percent gain in the Nasdaq.
"We have been expecting an increase in dividend as an attempt by Microsoft to align its dividend policy with that of the average S&P 500 company. However, we did not expect Microsoft to further lever its balance sheet. We view both developments as positive for the shares," said Caris & Co. analyst Sandeep Aggarwal.
According to Jeffries analysts, the dividend boost makes Microsoft one of the largest cash returners in the world. "When combined with last year's average $2.7 billion/quarter in share repurchases, this makes Microsoft one of the largest aggregate returners of cash to shareholders in the world, probably second only to Exxon Mobil," the analysts said in a research note.
"It is an anticlimax, but a step in the right direction," said Bill Smead at Smead Capital Management. Smead is a Microsoft shareholder and had urged the company for a long time to give more money back to the shareholders.
However, after the initial euphoria died down, Microsoft shares dipped on the bourse on Wednesday, reflecting the disappointment of the investors and analysts who had expected Microsoft to do more, such as announce a special dividend or issue a bigger payout. At 10.47AM (EDT), shares of Microsoft were trading down 2.43 percent at $24.54 on the Nasdaq.
According to Goldman Sachs analysts, Microsoft's step is "in the right direction," but they "believe that Microsoft could (and should) do more."
"The (latest) increase would imply a yield of 2.5 percent, slightly below the 10-year Treasury note at 2.6 percent, and significantly below the top 20 dividend yielding companies in the S&P, with market caps more than $10 billion," the analysts said.
Agrees Citi Investment Research analysts. "We continue to believe that news on the dividend payout is not the most important factor that will drive stock performance. Rather, we expect that the company's ability to address secular concerns in phone, tablet and online are more important," the analysts said in a research note.
The last time Microsoft had raised dividend payout was in 2008. After going public in 1986, Microsoft began paying annual dividends from 2003. In 2004, it gave back more than $30 billion to shareholders by issuing special dividend of $3 per share. It also started a quarterly dividend of $0.08 per share and raised it regularly till 2008, when it announced a quarterly dividend of $0.13 per share.
Microsoft is the latest of the cash-rich technology companies to succumb to pressure of giving back more money to its shareholders. While Intel and International Business Machines (NYSE: IBM) have hiked dividend payouts dramatically over the past 10 years, others like Oracle, Cisco and Xerox Corp. are beginning to feel the pressure of returning more to their shareholders.
However, there are a few companies that have continued to resist the pressure. While Hewlett-Packard has not raised its dividend since 1998, Apple Inc. stopped paying dividends from 1995 and Google (Nasdaq: GOOG), which went public in 2004, has never paid a dividend and says it doesn't intend to.
Technology companies generally are reluctant to pay dividends as they prefer instead to plow money back into research and development efforts that would help them compete in a rapidly-evolving market.
International Business Times, The Global Business News Leader
