Microsoft May Use Cash to Boost Dividend After Two-Year Lull

Microsoft Corp., the world’s largest software maker, may raise its quarterly dividend for the first time since 2008 as its cash hoard swells, data compiled by Bloomberg suggests.

This quarter, Microsoft may boost the dividend to 15 cents a share from 13 cents, giving the company an indicated dividend yield of 2.31 percent, according to the data. That increase would cost the software maker about $700 million a year.

Microsoft, which will probably post its biggest sales gain in two years when it reports fourth-quarter earnings today, had $39.7 billion in cash and short-term investments as of March 31. The company is looking for ways to reward shareholders after a 21 percent slide in the stock price last quarter, compared with the 12 percent drop in the Standard & Poor’s 500 Index.

“They really have to do something,” said Michael Holland, who oversees more than $4 billion, including Microsoft shares, as chairman of Holland & Co. in New York. “A dividend increase is a way for the board and management to signal their overall business is healthy.” Not doing it “would probably send an unintended signal,” he said.

Bloomberg bases its dividend estimates on seven criteria, including a company’s dividend history and public forecasts.

Same Strategy

Microsoft Chief Financial Officer Peter Klein said in January that he would hew closely to the strategy of his predecessor, Chris Liddell, who stepped down as CFO last year. The approach included holding a “target amount of cash” and using all operating cash left after capital expenditures and acquisitions for dividends and share repurchases, Klein said.

Microsoft spokesman Pete Wootton declined to comment.

Heather Bellini, an analyst at ISI Group in New York, concurs that Microsoft is likely to increase its dividend. Microsoft has typically focused on growth in operating profit to determine when to raise the dividend, she said in an e-mail.

“For fiscal 2010, given that we are forecasting operating income growth of 14 percent, we would expect an increase,” said Bellini, who advises buying the shares. Bellini also cautioned that any change to the tax rate on dividends may dissuade Microsoft from lifting it “materially.”

Microsoft will probably say fourth-quarter earnings per share rose to 46 cents, the average of analysts’ estimates compiled by Bloomberg, from 34 cents a year earlier. Analysts predict revenue will rise 16 percent to $15.3 billion.

PC Demand

The gains were fueled in part by rising demand for personal computers. Global PC sales rose 21 percent last quarter, according to Gartner Inc. outpacing the research firm’s forecast for a 19 percent climb. Intel Corp., the world’s biggest chipmaker, said last week that corporate spending is increasing.

Some technology companies have been turning away from large acquisitions, instead accumulating cash, which they may use for dividends and share buybacks, according to Bloomberg analysis. With International Business Machines Corp. and Analog Devices Inc. already boosting payouts this year, there’s increased pressure on other technology firms.

Bloomberg analysis predicts increases from Maxim Integrated Products, Broadridge Financial Solutions Inc. and Quality Systems Inc.

Over the past decade, Microsoft, with one of the biggest cash piles among non-banking companies, has experimented with strategies to return funds to shareholders.

Payout History

Microsoft declared its first dividend in 2003, when it had more than $43 billion in the bank. Less than two years later with cash mounting, the company paid a special one-time dividend of $3 a share.

Microsoft rose 69 cents, or 2.8 percent, to $25.81 at 12:34 p.m. New York time in Nasdaq Stock Market trading. The shares had lost 18 percent this year before today.

In 2006, when investors urged the company to repurchase at least $60 billion of stock, Microsoft tried a $20 billion tender offer for its own shares. The offer failed to generate enough interest and investors tendered just $3.8 billion in stock.

Microsoft is now in the middle of a $40 billion repurchase program that runs through 2013. The company stopped repurchases for three quarters during the economic slump to conserve cash.

Since the recession ended, many investors have shown a preference for using the cash for payouts rather than buybacks, Holland said. There isn’t much evidence that repurchases raise the stock price, especially with regard to Microsoft, he said. The stock trades in the same range as it did five years ago.

Still, a dividend increase may do little to assuage investors seeking new areas of growth now that Microsoft’s Windows 7 operating system is out the door. Some shareholders are concerned about the company’s declining market share in mobile phones and Apple Inc.’s ascent in tablet-style computers, said Tony Ursillo, an analyst at Loomis, Sayles & Co. in Boston.

That may pose a threat to notebooks running Windows, said Ursillo, whose firm owns Microsoft shares.

“People cared about Windows 7,” he said. “They don’t seem to care about anything else that may be going well for the company.”

To contact the reporter on this story: Dina Bass in Seattle at dbass2@bloomberg.net

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