Will Microsoft's $80 Billion Bet on Itself Pay Off?

Microsoft (MSFT 1.65%) has never shied away from returning money to its shareholders. When the software giant announced a $40 billion share repurchase program late last year it was merely taking the baton from a similar $40 billion buyback plan that was about to lapse. The original $40 billion in repurchase authorizations was announced in 2008, and just before the second round was made official Microsoft had all but $3.6 billion left on the first $40 billion.  

It's not just gnawing away on its own stock. Microsoft has been generous with its payouts, too. It increased its quarterly dividend rate by 11% last month, following a 22% boost a year earlier. This isn't just lip service. Microsoft returned $15.7 billion to shareholders through buybacks and dividends in its fiscal year that ended in June. 

A lot is the result of living up to what is now a hearty 2.8% yield for stakeholders, but the company did shell out $6.4 billion of that $15.7 billion to swallow up 175 million shares in fiscal 2014. It has spent at least $4 billion in each of the past four years to eat away at its bountiful share count. That would normally eat away at a company's diluted share count -- propping up profitability on a per-share basis -- but Microsoft has also been very generous with stock grants and issuing equity to settle up acquisitions. Let's go over the past four fiscal years of the ups and downs of Mr. Softy's share count. 

Source: Microsoft SEC filings 

That's a lot of money. We're talking about $26.5 billion over the past four years. The share count has gone from roughly 8.7 billion to 8.2 billion in the span of those four years, but most of that came in fiscal 2011 when it acquired slightly more shares than it did through the next three fiscal years. In fact, Microsoft's share count has only decreased by 1.6% over the past three fiscal years.

Pay it forward
Microsoft's generosity will continue.

"We will have a balanced approach in terms of both share buyback as well as dividends that's the approach we have taken over the last multiple years and that will be the same thoughtful process that I expect us to do continue with going into the next fiscal and beyond," CEO Satya Nadella said in July's earnings call.

Why not? Microsoft is a mature technology company generating gobs of cash flow. Some may argue that Microsoft is better served by reinvesting in growth, but how has that played out in the past? It has cut 10-figure checks for Skype, aQuantive, and more recently Nokia's handset business, and many would suggest that it overpaid on all fronts. It can invest in in-house growth initiatives outside of its core software business, but that also has been a gamble. Microsoft continues to post annual losses in its Bing-fueled online services division, and its once market-leading Xbox platform has fallen behind the PS4 in this generation of gaming consoles. 

This doesn't really have to be a choice. Microsoft is flush with cash. It had $85.7 billion in cash and equivalents at the end of June. Like most global tech juggernauts a lot of that greenery is tied up overseas, but Microsoft still has plenty of wiggle room to continue returning money to its shareholders. Even if it hasn't made much of a dent in its hefty share count over the past three years it's a better use of idle cash than simply collecting a pittance in interest income. Microsoft doesn't always get it right. It was too late to the smartphone, tablet, and paid-search booms. Its operating system is being challenged by cheap Chromebooks and high-end Macs. However, returning its bountiful cash to its shareholders is the right call.