Is a Microsoft stock buyback ahead?

nahdoic

Is a Microsoft stock buyback ahead?
Wall Street analysts expect Microsoft Corp. to post sizable increases in revenue and profit when it discloses results for its fourth quarter and 2004 fiscal year later this week. But given the timing, much of the focus will be on a different figure: the company's cash.

Microsoft executives have said they will announce a plan for the cash pile -- which had grown to more than $56 billion at the end of the third quarter -- during or sometime before a meeting with analysts July 29 on Microsoft's Redmond campus. Whether that announcement comes this week or next, the cash is sure to be a central topic Thursday, when the company releases its financial results.

With the self-imposed deadline looming, there has been growing speculation about what the company will do with its cash. Some analysts believe Microsoft's strategy will include repurchasing a significant number of its own shares. The idea behind such a move is to reduce the number of shares in the market, increasing a company's ratio of earnings per share and boosting its stock price as a result.

The stock market often reacts favorably to repurchase programs because they signal that a company believes its shares are undervalued, said Peter Brous, an associate professor of finance at Seattle University. Some investors also like repurchase programs because they remove the possibility that the company will spend the cash frivolously, on ill-advised acquisitions or other money-losing initiatives.

In other situations, investors may take a repurchase program to mean that a company believes the potential liabilities for which it was hoarding cash have been cleared. Microsoft, in particular, has cited its antitrust challenges as a primary reason for keeping so much cash on hand. Last month's federal appeals court ruling, upholding Microsoft's landmark U.S. antitrust settlement, cleared "the last area of legal doubt" keeping the company from doing something with its cash, Microsoft general counsel Brad Smith said at the time.

For all those reasons, major stock repurchase programs, on average, tend to increase a company's share price.

But it doesn't always work out that way. A repurchase program, for example, may also be perceived by the market as a sign that a company has "no perceived good use of the cash," Brous said. Some investors might prefer the company to use its money for smart acquisitions or investments -- initiatives that might increase wealth in the long run.

"It's pretty complicated. There are lots of possibilities here," Brous said of the ways a repurchase program can affect a company's share price. "It's not a sure thing."

In addition to repurchasing stock, some analysts believe Microsoft may also look to significantly increase its annual dividend from the current level of 16 cents per share. Another possibility, initially rumored more than a year ago, is a huge, one-time special dividend to investors. But that theory has attracted plenty of skepticism.

"I'd expect that they'll do a combination of a steady-but-strong increase in the dividend rate over the next several years, and probably kick up share repurchases," said Robert Becker, equity analyst at Argus Research Corp. "I do not buy into the one-time dividend fantasy."

Whatever it involves, and whenever it's announced, Microsoft's new cash strategy would effectively end one of Corporate America's major subjects of fascination in recent years. Microsoft's cash is a frequent subject of analyst queries during conference calls with the company's chief financial officer, John Connors.

Discussing the cash during last year's annual meeting with financial analysts, Connors urged investors to be patient -- citing a line from a country-western song, "If you've got the money, honey, I've got the time."

Since then, Microsoft has cleared major hurdles on the legal front, settling antitrust disputes with companies including Sun Microsystems and resolving many of the consumer class-action suits that grew out of the findings in the government's U.S. antitrust case.

Although the European Commission's antitrust arm imposed a record fine against the company, about $600 million, the release of that decision removed an element of uncertainty by putting a ceiling on Microsoft's potential liability in the case. The company is appealing the fine and other elements of the ruling.

In the meantime, Microsoft's share price has remained relatively flat, hovering between $24 and $30 during the past 12 months. Shares of Microsoft rose 47 cents yesterday to end trading at $27.95 in Nasdaq Stock Market trading.

Goldman Sachs analyst Rick Sherlund, in a report last month anticipating a stock buyback by Microsoft, predicted that "an aggressive share repurchase would be materially additive to earnings and could be a positive catalyst for the stock."

What would you do if you had 56 billion cash in the bank? (Mind you it's only US dollars - hardly worth anything these days )

Victor

Buybacks are usually an indication that companies have more money than they know what to do with.

Of course the EU fien will make them €500m poorer

I wonder if they can buy Bill Gates out?

Captain Trips

In the meantime, Microsoft's share price has remained relatively flat, hovering between $24 and $30 during the past 12 months. Shares of Microsoft rose 47 cents yesterday to end trading at $27.95 in Nasdaq Stock Market trading.[/B]

Well that's the problem then. Growth isn't expanding, it's flat. And that's not good is it? IANAE (Economist).

Victor

Something interesting came to mind - they sold off their Dublin offices in a sale and leaseback agreement about 2 years ago. Surely not a great idea when sitting on a cash mountain?

http://www.rte.ie/business/2004/0721/microsoft.html

Massive Microsoft shareholder pay-out
July 21, 2004 09:04

The world's top software maker Microsoft plans to return more than $75 billion in cash to shareholders over the next four years in the largest corporate pay-out ever.

Shares in the company rose 5% in after-hours trade on Wall Street following Microsoft's announcement that it planned to buy its own stock, double its dividend and issue a special once-off dividend.

Microsoft, which generates about $1 billion in cash per month, said it would still have enough funding for research and to make acquisitions.

Microsoft has been under mounting pressure from investors to return cash to shareholders as its sales growth has slowed, its share price has stalled and it has successfully settled major legal disputes with governments and competitors.

By pledging to return $75 billion in cash - equal to what US President George Bush requested to fight the war in Iraq - over the next four years, Microsoft effectively will use up all of its cash reserves, expected to top $60 billion in the quarter just ended.

Analysts say they believe Microsoft has more than $70 billion in liquid assets, including investments in other companies.

Microsoft's board of directors approved a quarterly dividend of 8 cents per share, effectively doubling the current 16 cents per share annual dividend. Microsoft will also buy up to $30 billion of its own stock over the next four years. The board also approved a special dividend of $3 per share, subject to shareholder approval at the annual meeting in November.

The biggest shareholder, company co-founder and chairman Bill Gates, said that he would be giving his estimated $3 billion pay-out to his charitable trust, the Bill & Melinda Gates Foundation.

MadsL

Sale & leaseback = Flexibility and liquidity....

Victor

MadsL wrote:

Sale & leaseback = Flexibility and liquidity....

Who needs liquidity when you have US$75bn in the bank?