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A Closer Look at Microsoft's Share Buyback, Dividend Increase Announcments

by: Stone Fox Capital September 23, 2008 | about stocks: MSFT    

Stone Fox Capital

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Yesterday, Microsoft (MSFT) announced a significant share purchase program and an increase to the quarterly dividend. MSFT was up 1% yesterday during a horrible market providing a relative gain against the market of 480 basis points. Very impressive, considering that MSFT didn't annonce better results or a revolutionary product. It was all because MSFT has the financial liquidity to make shareholder friendly moves. This is one of the reasons a net payout yield portfolio can be very attractive.

Lets analyze what MSFT announced:

  • Declared a quarterly dividend of $0.13 per share, reflecting a two cent or 18 percent increase over the previous quarter's dividend.
  • Approved a new share repurchase program authorizing up to an additional $40 billion in share repurchases with an expiration of September 30, 2013.
  • Authorized debt financings from time to time of up to $6 billion. Pursuant to the authorization, the company has established a $2 billion commercial paper program.

The increase in the dividend now provides a 2% yield which gets MSFT to a level that starts making them attractive to dividend investors. This is an improvement

The $40B buyback over 5 years sounds significant but it really just continues what they've done in the past. This averages $8B a year and over the last 12 months they've bought back $9B. So again, the key to this portion of the net payout theory is too watch how much they spend on a quarterly basis.

Issuing debt to buy back stock is not appealing to me. Now I've not seen any studies on the impact of the stock prices, but it's definitely more appealing when the buyback comes directly out of earnings. The debt causes them to lose the liquidity that is so appealing. MSFT, on the other hand, has plenty of cash so I'm not sure why they would need debt unless they plan to be like Home Depot (HD) and do a huge buyback all at once.

All in all, this announcement isn't earth shattering, but it does solidify why MSFT is the primary tech holding in my Net Payout portfolio. MSFT currently yields 6% which is low for the portfolio, but high for a tech stock.

Disclosure: None

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This article has 4 comments:

  •  
    Sep 24 11:33 AM
    2% yield on dividend on MSFT? OH BOY!!! Inflation was 5.2% for the quarter... Take off for taxes and the 2% comes down to 1 1/2%. OH BOY!!! Great buy on dividend basis. lol lol
    Reply
  •  
    Sep 24 03:45 PM
    We did not notice anything from Microsoft which indicated the purchases would be made on an open market. Perhaps they have a private seller in mind. But who could possibly own so many shares? Someone within the walls, perhaps near the Gates?

    Aside from a slow condensive (cf. dilutive) effect on outstanding shares, it shouldn't make a ripple.

    Reply
  •  
    Sep 24 10:44 PM
    Debt at 2% rates? Try the simple fact they lower their overall cost of capital. The cost of equity is easily assumable to be well in excess of 2% - the simple dividend alone is 2%. From a financial point of view, debt financing in this case is a no-brainer.

    If you don't think it is a good idea, you need to retake your intro to finance class.
    Reply
  •  
    Sep 25 11:11 AM
    Never said that a 2% dividend was a great buy but that dividend investors would start finding MSFT appealing. The real reason to own them would be the 6% Net Payout yield. Though 6% doesn't even place them in the top half yields of Dow stocks.

    Debt financing to buyback stock is never ideal. The company is playing games with the balance sheet as opposed to really giving back to shareholders.
    Reply
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