MSFTextrememakeover

Thursday, November 09, 2006

What exactly is MSFT's dividend strategy?

Dividends are a significant part of the historical return attributed to stocks and the market generally. Indeed, of the oft-quoted 10% average market return, some 4.5% of that represents dividends. Which is why a company's dividend and its strategy wrt to said, are important to investors.

MSFT declared its intention to pay a dividend in January of 2003. This was coincident with the last ill-advised split, and amounted to $0.08 ($0.16 pre-split). Neither announcement was well received by investors, with many "growth" players seeing the dividend as an admission that MSFT's best growth was behind it and abandoning the stock (which, unfortunately, proved to be correct - at least to date). For those who remained, the initial dividend was far below market and therefore near-meaningless. This was addressed, to some extent, over the following 12-18 months, as MSFT followed up with some fairly aggressive and consistent increases - which provided a basis for future optimism. Then came the brain-dead and fiscally-irresponsible $3 one-time, which proceeded to tank the stock some $5 or more before the dust settled. Since then, it's been difficult to discern what MSFT's strategy is for the dividend. The early (directionally positive) momentum, has been replaced with long periods of no increases or, more recently, modest $.01/Q per year (or so) ones. Currently, MSFT pays just 1.38%, while the S&P average for dividend-payers is 2% (1.52% for all 500 issues combined). Now, bear in mind that MSFT hasn't been able to even keep pace with that index for the past 5 years (although it has a shot at doing so this year). Also, unlike almost all those companies, MSFT is still sitting on ~$32B of cash and short-term investments, as well as another $8.7B of "Equity and other investments" (all figures as at last Q) - the necessity for the latter being a subject unto itself.

The bottom line? If, despite recently paying the management team $1B in bonuses and pouring $B's more of shareholder cash into buybacks (which, thankfully, aren't being diluted even faster for a change), Ballmer is still having trouble figuring out ways to spend MSFT's enormous cash horde - which appears to be the case (see here, here, and here) - how about this suggestion: increase the dividend? Quite frankly, how any leadership team sporting that abysmal track record of performance versus the S&P can still be in power, is difficult enough to understand. But how they can do so while simultaneously sitting on a mountain of cash, and nevertheless paying a grossly under-market dividend, is unfathomable. You can't have weak growth, poor relative performance to the market, AND a far below market dividend, and still expect anyone to find your stock particularly attractive. So if you're truly "shareholder-focused", start demonstrating that fact by raising the dividend to at least the S&P dividend-payer average of 2%. You know... like say, INTC (2.32%)?

OT but related: watching CSCO's surge today following very strong numbers last night, I see that they've now joined the growing list of companies, including SAP, ORCL, AAPL and others, who's stocks have outperformed MSFT over the past 10 years. Ballmer says that shareholders need to take a "long-term" focus. Isn't a decade a reasonable timeframe in which to assess management's performance in their primary mandate of increasing shareholder value? If MSFT can no longer outgrow many of its competitors for investing $, stubbornly refuses to ditch money-losing new ventures or make deep cuts in existing core businesses to better drive earnings, and continues to lag many peers and all major indexes wrt the stock, then hadn't it better start providing at least a market dividend in exchange for anyone bothering to hold it as anything other than a trade?

4 Comments:

  • Ballmer and company's inability to deliver a compelling story to investors, as well as multiple screwups (a late Vista, multibillion dollar losses with xbox, no accountablity for execs, and so on) do suggest that they should acknowlege that MSFT is no longer a growth company, and should pay out the majority of the company profits in the form of dividends.

    Management's ongoing mistakes and poor judgement also suggest that the Board of Directors should fire a bunch of execs, but I won't hold my breath.

    By Anonymous John, at 7:30 PM  

  • How can you even discuss dividend strategy without discussing the MSFT buyback strategy?

    I've never bought the argument that people are ignoring MSFT because it doesn't fit into either growth or value. Who cares? Intrinsic value is intrinsic value. Every company has growth, and value. MSFT is a bit more balanced.

    Please back up your statement that the dividend cost MSFT $5. I see no evidence of that whatsoever. The stock simply returned to its intrinsic value after all the dividend hype subsided.

    I agree with many of your conclusions, and can't help but feel the stock is overpriced today.

    -Brian
    MSFT employee / investor.

    By Anonymous Brian, at 1:58 PM  

  • "How can you even discuss dividend strategy without discussing the MSFT buyback strategy?"

    You mean the one that spent > $30B from FY 00 to late 05 with virtually no impact on shares outstanding (shares+equivalents actually rising)? Beyond both representing a use of cash, the dividend story needs to stand on its own for numerous reasons (predictability, appeal to income investors, requirement for many value funds to hold a stock, etc). Plus, why bother having one if it doesn't do so? Also, given MSFT's cash, it's not an either/or - as I tried to point out in the piece.

    "Please back up your statement that the dividend cost MSFT $5."

    To clarify, I didn't say it cost MSFT $5. It cost MSFT ~$35B as I recall - well, actually cost us shareholders since it was our cash to begin with. What I said was that it tanked the stock $5, and was referring to the immediate $2.58 drop on the payout date, followed by the sickening slide thru 3/29/05 as dissapointment over that drop turned into a selling frenzy. Bottom line: the $3 one-time was a total failure and imo one of the worst uses of cash in corporate history. A fraction of that $35B put into an immediate, higher, ongoing dividend, would have been far more cost-effective, maintained the bulk of that cash for acqs or interest income (or even real buybacks now that we have them), avoided the months of uncertaintly, and provided a better return for LT general shareholders (vs the only people who really did benefit - primarily traders, institutions and even insiders). Can you tell that I have strong feelings on this and voted against it at the time? LOL! Well, actually against the related change to employee grant/option strike prices, since we shareholders weren't asked to directly vote on the payout of our own money. It's worth noting that Ballmer has belatedly conceded on several occasions that it didn't work out quite as planned. Duh. And CFO Liddell has stated his desire not to see a repeat.

    By Blogger MSFTextrememakeover, at 10:30 AM  

  • Stock prices don't respond to a dividend payout on the payout date. Rather, stock prices respond when the stock begins trading "ex-dividend" ... you might check to see what the stock price did overnight between the day before and the day of going ex-dividend. Excluding external market and company risk factors, THAT will tell you the actual effect of the one-time dividend, plain and simple. Shareholders who owned the day before, received the dividend payout. Those who bought the day the stock began trading ex-dividend or afterward, did not. This is easily verifiable in any finance or valuation text, or among dozens of analytical finance journals.

    -- Robert

    By Anonymous Anonymous, at 12:23 PM  

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