Microsoft Raises Dividend, May Borrow Up to $6 Billion More

Microsoft Corp. raised its quarterly dividend by 3 cents, or 23 percent, to 16 cents a share and got approval from its board to sell as much as $6 billion in additional debt.

“This 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,” Microsoft Chief Financial Officer Peter Klein said yesterday in a statement.

Microsoft is planning to sell debt this year to pay for dividends and share repurchases because much of its cash is held overseas, a person familiar with the matter said last week. The company will try to raise as much as possible without jeopardizing its debt rating of AAA, the highest available, said the person, who declined to be named because the plans are confidential and not completed.

The dividend increase was a sign Microsoft is confident in its ability to generate cash, said Brent Thill, an analyst at UBS AG in San Francisco.

“While not as high as some Street expectations, it was a larger incremental increase than the 2-cent dividend hike Microsoft’s board approved in fiscal year 2009,” he said in a note to clients.

‘Meaningful’ Acquisition?

Source: Microsoft Corp. via Bloomberg

Peter Klein, newly appointed chief financial officer of Microsoft Corp. Close

Peter Klein, newly appointed chief financial officer of Microsoft Corp.

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Source: Microsoft Corp. via Bloomberg

Peter Klein, newly appointed chief financial officer of Microsoft Corp.

Thill, who recommends buying Microsoft shares, estimates the company will generate $25 billion in free cash flow in the current fiscal year. Based on that, Microsoft could potentially increase its share repurchases beyond his $12 billion estimate for the year or pay for a “meaningful” acquisition, he said.

Bloomberg data had indicated the company would increase its quarterly dividend by 2 cents a share, while Heather Bellini, an analyst at ISI Group, predicted an increase of 4 cents. A quarterly dividend of 16 cents would yield 2.5 percent.

Microsoft fell 45 cents to $24.70 at 9:55 a.m. New York time in Nasdaq Stock Market trading. The shares had dropped 17 percent this year before today.

A debt offering may come before the end of the company’s fiscal year, which closes next June, and could come as soon as this calendar year, the person familiar with the matter said.

Issuing $6 billion probably wouldn’t put the rating at risk, according to data compiled by Bloomberg. The company, based in Redmond, Washington, is under pressure to return more cash to shareholders amid declines in its stock price this year.

Cash Hoard

Microsoft reported $36.8 billion in cash and short-term investments at the end of last quarter. Much of that is held overseas, forcing the company to pay taxes on the money if it uses it for dividends or stock repurchases. Bellini estimates that about 74 percent of Microsoft’s cash is overseas.

Microsoft said yesterday that in the 10 years through June, it had returned almost $170 billion to investors through dividends and share repurchases. The company began its dividend in 2003 and offered a $3-a-share special dividend in 2004.

Microsoft sold its first debt in May 2009, a $3.75 billion offering, in a bid to diversify its capital structure and add to its cash pile for acquisitions, capital expenses and share buybacks. The sale was comprised of $2 billion of 2.95 percent, 5-year notes; $1 billion of 4.2 percent, 10-year debt; and $750 million of 5.2 percent, 30-year bonds.

In June, Microsoft said it would sell $1.15 billion of convertible senior notes due in 2013 and use the proceeds to retire some of its commercial paper.

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

To contact the editors responsible for this story: Tom Giles at tgiles5@bloomberg.net

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