Microsoft Corp. is planning to sell debt this year to pay for dividends and share repurchases because too much of its cash is held overseas, according to a person familiar with the matter.
The company would try to raise as much as it can without jeopardizing its debt rating of AAA, the highest possible, said the person, who declined to be named because the plans are confidential and not completed. Microsoft could probably issue as much $6 billion more in debt without putting its rating at risk, according to data compiled by Bloomberg.
Chief Executive Officer Steve Ballmer is under pressure to return some of the company’s $36.8 billion in cash and short term investments to investors in the form of dividends or share buybacks. Much of that is held overseas, requiring Microsoft to pay taxes on money brought home. The software maker would follow Home Depot Inc. and Dell Inc., which issued bonds this month as investment-grade borrowing costs hover near record lows.
“They obviously think their stock is cheap and getting debt is cheap, so why not issue debt,” said Jason Brady, a managing director at Thornburg Investment Management. The company can issue at least $5 billion of new debt without putting its rating at risk, he said. Thornburg, in Santa Fe, New Mexico, oversees more than $56 billion, including Microsoft shares.
Timing of Offering
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 said.
Microsoft, based in Redmond, Washington, fell 16 cents to $24.95 at 9:51 a.m. New York time in Nasdaq Stock Market trading.
Microsoft had about $22 billion in free cash flow last fiscal year with about half of that in the U.S. and half overseas, the person said. The company’s debt is rated Aaa by Moody’s Investors Service and AAA by Standard & Poor’s. Peter Wootton, a spokesman for Microsoft, declined to comment.
Heather Bellini, an analyst at ISI Group in New York, wrote in a Sept. 12 research note that she expects a debt offering of as much as $10 billion “in the near term.” That figure is probably too high, said the person familiar with Microsoft’s plans.
Bellini also said she expects the company, whose board is meeting in the next several weeks to discuss dividend and buyback policy, to raise its quarterly dividend 4 cents to 17 cents a share. Bellini estimates that 26 percent of Microsoft’s cash balance is located in the U.S.
Executives of the company are weighing share repurchases and dividend increases to boost the stock, which had fallen 18 percent this year before today.
Chief Financial Officer Peter Klein faced questions at a Sept. 7 Citigroup Inc. conference on why Microsoft doesn’t take on more debt to expand share buybacks or fund a major increase in the quarterly dividend, currently at 13 cents a share.
Asked by an attendee about raising “cheap debt financing” and using it for a buyback, Klein replied: “That is certainly one important factor in our overall strategy related to capital structure. It’s obviously a topic we’ve been thinking about a lot right now.”
Klein declined to say whether that step was “likely or unlikely” until he is able to speak to Microsoft’s board.
Microsoft started paying a dividend in 2003 and offered a $3-a-share special dividend in 2004.
The company has repurchased more than $78 billion in stock since fiscal 2006 and is in the middle of a $40 billion buyback allowance that runs through 2013. A decision to take on more debt, raise the dividend or increase the buyback plan would involve board approval.
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.
More recently, in June, Microsoft said it would sell $1.15 billion of convertible senior notes due in 2013 and will use the proceeds to retire some of its commercial paper.
The average yield on investment-grade debt was 3.89 percent as of yesterday and reached as low as 3.74 percent on Aug. 24, according to Bank of America Merrill Lynch’s U.S. Corporate Master index.