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Microsoft payout plan may nudge other firms

By Brier Dudley
Seattle Times technology reporter

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You'd think Microsoft stock would soar, with Bill Gates and company handing out $75 billion, but investors bid the stock up just 64 cents yesterday.

Still, the historic payout plan announced Tuesday could have a longer-term effect if it persuades other cash-rich corporations to share more with shareholders, although leading tech companies said yesterday they had no plans to follow Microsoft's path.

Investors may also be awaiting the company's report today of earnings during the quarter and fiscal year that ended June 30, as well as its updated outlook for 2005.

The stock rose 2 percent to close at $28.96 in the first day of trading after the company announced a sweeping plan to return a large portion of its cash to shareholders.

A one-time $3 per share dividend will be paid in December, the regular dividend will double to 8 cents a quarter and up to $30 billion will be spent buying back stock over the next four years.

Altogether the company will spend up to $75 billion on the plan, the largest such payout in the history of corporate America, according to Standard & Poor's.

Yet investors remain skittish about technology.

"I think there's a tremendous amount of uncertainty about technology generally, and I think it reflects that," said Brendan Barnicle, an analyst at Pacific Crest Securities in Seattle.

Analysts also said the payout scheme is already reflected in the stock price, since Microsoft was widely expected to somehow distribute its cash now that most of its antitrust cases are resolved.

"It's been more of a question of when rather than if," said Morningstar analyst Joe Beaulieu in Chicago.
 
Now the question is whether other technology companies will follow suit. None has the cash or cash flow of Microsoft, but the Redmond software company is influential, said Howard Silverblatt, an equity analyst with S&P in New York.

Silverblatt said Microsoft's decision to start issuing a dividend 18 months ago marked a new approach.

"The yield was not a lot; it was the idea they were paying — it was a coming of age, an acceptance maybe by people that didn't want to accept it, they're an established organization, they have product lines that are developed, they have steady cash flows," he said. "In that sense there's no difference with old line industrial businesses."

Microsoft has the most cash of any U.S. company, with $56 billion reported at the end of March, but others have also built large cash piles in recent years.

Cash on hand doubles

The amount of cash on hand at companies has more than doubled over the past four years, and this year is expected to grow further as earnings improve and hiring remains relatively flat, improving margins, according to S&P data.

Companies have to figure out what to do with all that money, and Microsoft may nudge them to return more to shareholders, Silverblatt said.

"The idea of what to do with all this cash has been discussed in all the board rooms already, now it's going to be a public discussion," he said.

Since the beginning of the year, 152 companies have increased their dividends and nine have initiated dividends, he said.

Yet most cash-heavy tech companies yesterday said Microsoft's move won't spur them to share more of their cash with shareholders.

Hewlett-Packard, with $15 billion in cash, declined to comment, but a spokeswoman noted the company announced a $2 billion stock buyback in May.

An Intel spokesman said the company is in a more cash-intensive business than software, and that its new chip-fabrication plants cost $2 billion to $3 billion apiece.

"You do need a good amount of money in the semiconductor business to be able to keep building these fabs," spokesman Robert Manetta said.

Intel, which has $13 billion in cash, has issued a dividend since 1992 and doubled it in January, from 2 cents to 4 cents a quarter.

Cisco has $8.9 billion but does not plan to imitate Microsoft's plan.

"We believe our share-repurchase program, combined with ongoing strategic investments in our business and maintaining a strong cash balance, are in the best interest of our shareholders," spokesperson Terry Anderson said via e-mail. "Our board has and will continue to evaluate if, when and in what amount a dividend will be paid."

Nor will Microsoft's move change the approach at IBM, where a spokeswoman noted the company has issued dividends since the early part of the last century. IBM, which has $8.5 billion in cash, increased its dividend nine times since 1996 and now pays 18 cents a quarter.

"No, it will not have any impact," spokeswoman Clay Helm said via e-mail. "We have had a diverse cash strategy in place for many years."

Underwhelmed by news

Also underwhelmed by Microsoft's move were state economists, who predict the $3 per-share payout will provide a modest boost to the state.

Exactly how much will be distributed in the state is unclear, but it will certainly pale compared to the massive wealth created by Microsoft stock options in the late 1990s, said Roberta Pauer, regional labor economist with the Employment Security Department.

"There will be a small positive impact, but it will not provide the kind of major stimulus that the appearance might give," she said.

The state's chief economist, Chang Mook Sohn, noted that the payout plan further emphasizes a new approach at Microsoft that shifts gains more to shareholders than employees via stock options.

"It really signals that the company is a mature company now, and it is the end of that record growth period that we have seen in the '80s and '90s," he said.

Brier Dudley: 206-515-5687 or bdudley@seattletimes.com