Thursday, September 13, 2007

Still searching for a dividend strategy

Okay, so I've posted before about MSFT's dividend strategy:

More specifically, their lack of one. I also noted in a recent post that CFO Liddell dropped some hints that led me to believe we'd see some changes:

He also seemed to foreshadow some improvement in the dividend strategy (which has been a total mess so far). Although he still expressed a preference for buybacks vs dividends.

Well, late yesterday we got MSFT's apparent first attempt at that. [note: someone might want to tell Investor Relations to update their dividend section since it still reflects the old info]. As we've come to expect from this leadership team, it was done in the usual clumsy, ineffective manner - at least if it was meant to communicate a move to a more serious, competitive, dividend strategy versus the previous hodgepodge. 

The actual announcement? Another .01/Quarter increase - just like last time. That brings us to .44 annually, or 1.51% yield at the current closing price. But due to the now higher share value, that's actually a lower yield than when MSFT announced the last dividend increase (1.51% vs the then 1.54%). It's also a smaller % increase on its own. Clearly, management isn't telegraphing much confidence in the future stock price despite its depressed YTD performance.

By way of comparison, INTC's current yield is 1.77% and IBM's is 1.6%. The S&P 500 average is 1.71% (2.2% if you count just dividend-payers) and the DOW 30 average is around 2.3%. In other words, even with this increase, MSFT's dividend lags behind the S&P 500 average, the DOW 30 average, and behind some of its equivalent tech peers - as it has since inception. But the "bonus" is that you get worse-than-market stock performance too! For example, down over 2% YTD while the NAS is up more than 7%, for a total 9% relative underperformance (7%, if you want to compare to the S&P).

If you're looking for a bright spot, I guess you hang your hat on the fact that a penny still represents a 10% increase. Also, that the announcement comes in the same month as last year (versus December previously). That and the same [nominal] increase, is at least a move towards some consistency. Of course if you're cynical, you could infer that MSFT management simply decided that dividend increases are one way to placate disappointed investors ahead of the annual shareholder's meeting. Now you see the pea, now you don't...

As posted above, Liddell (at least) still professes a preference for buybacks over dividends. I'm unsure why personally, and he's never elaborated. FWIW, I'm not against buybacks per se. My problem with the MSFT variety is that for most of their life they've gone to offsetting dilution vs actually reducing shares outstanding. They've been much more effective at the latter over the past 1-2 years, but MSFT can no longer sustain that pace without further reducing cash and/or doing what some Wall St. fund managers have actually suggested: taking on debt to do even larger ones. Buybacks also have an inherent risk that management will abuse them to game EPS or prop up the stock, rather than buying because they truly believe their shares are undervalued. Not that this team would ever do that, of course. Cough, cough...

Nevertheless, you can be confident there will be more buybacks, if only to offset ongoing dilution from management/employees and the increased supply in the market caused by Gates massive ongoing sales. Hopefully, we'll also see more dividend increases and an attempt to actually be on par with at least the average, if not true peers. While some will argue that MSFT should have better things to do with their cash than pay dividends or do buybacks, I say:

1) Dividends represent a significant % of the oft-quoted historical "market" return for equities

2) MSFT is still way over capitalized and kicking off far more cash that the business requires, especially the profit centers.

3) This leadership team has shown little aptitude for making wise investments with spare cash - quite the reverse, in fact.

Bottom line, I'll take the penny per quarter increase. Thanks. Maybe shareholders will almost break even on the stock by year end now. But MSFT needs to either get a competitive strategy in place for dividends asap, or rethink why they bothered to implement a dividend in the first place. Alternatively, the leadership team can just continue to do nothing and wonder why investors aren't particularly interested in a stock that has both below-market performance and a below-market dividend.


Update: OT to this post, but worth a mention. If you've been following the media fallout on this issue today, see MSFT's response here. Didn't resolve all questions, but nicely done. Kudos to Nate and his team for putting together a timely, comprehensive explanation while still acknowledging the need to provide greater clarity in future.


  • Sometimes I wonder whether their preference of purchasing stocks over giving out dividend has something to do with insiders dumping the stocks.

    By Anonymous Anonymous, at 11:38 AM  

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