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Microsoft to Give Shareholders $32 Billion in Dividend Payment

November 30, 2004

Nov. 28–Microsoft, the world’s biggest software maker, this week will empty its pockets of more cash than any company in history.

It’s giving $32 billion to shareholders as part of the largest-ever dividend payment. That’s enough to buy every person in the world two cafe lattes from its Seattle neighbor, Starbucks.

It also is the grandest example of a growing corporate gesture: returning money to investors. Goosed by changes in the tax code and balance sheets flush with cash, more U.S. companies are paying dividends as they seek to maximize stockholder return.

By the end of the year, $217 billion will have been paid out by companies in the Standard & Poor’s 500, the index estimates. That’s up from $147.8 billion two years ago. Among companies that began paying dividends this year are retailers Staples and Costco.

“Any company with a lot of cash is going to have a hard time not paying dividends,” said Mark H. Lang, an accounting professor at UNC-Chapel Hill’s Kenan-Flagler Business School. “Because of the tax-law changes, it is much harder to argue why you shouldn’t.”

Last year, the government reduced the levy on dividends to 15 percent from as much as 39 percent. The change aimed to leave more money with investors and stoke interest in stocks.

Microsoft plans a one-time payment of $3 per share. Of the total, individuals will receive about $10 billion. Even if you aren’t among them, you might still benefit. The other $22 billion goes to pension and mutual funds that own Microsoft shares, increasing the return on retirement savings.

It’s a flood of cash coming during the busiest shopping season. But don’t expect the payout to boost the economy in the way President Bush’s $14 billion child tax credit did last year. Many recipients of that money spent it at Wal-Mart and Home Depot. The Microsoft cash is unlikely to meet the same fate.

Most individuals who own the company’s shares hold them indirectly. Instead of getting a fat check in the mail, the majority will see the cash deposited into their brokerage accounts.

“We believe that money is going to mostly be put right back into the market,” said Howard Silverblatt, an equity analyst with S&P in New York. “It’s going to people who, in general, will be looking at that money as more investable and more discretionary.”

Still, the country’s overall economic health could get a bump. Stocks are likely to rise as the money flows in and investors buy.

That Microsoft pays a dividend makes it a bit of an anomaly in the tech world. Most high-tech companies prefer to plow profits back into research or expansion.

In fact, finance experts say dividends can be a bad idea. Investors want executives to get the highest return, often through acquisitions and investment in plant and products. When leaders opt to pay dividends, it can signal that they have no better way to use the money.

Those that pay generally have been mature, slow-growth businesses such as Progress Energy. They’re a favorite of older investors who count on the cash to supplement their incomes.

The tax change, however, has pressured other companies. Many have initiated or raised dividends. In addition to Microsoft, QualComm is another tech heavyweight that has begun to pay.

For Microsoft, a dividend was a logical choice, experts said. The company, which accrues about $42 million in cash a day, amassed huge reserves as it faced antitrust litigation. When the threat subsided, Microsoft had less reason to hang onto the cash.

What’s more, the company, one of the world’s fastest-growing a few years ago, has evolved. Growth has stabilized and there are fewer demands on the cash.

“With Microsoft, the growth is not going to come like it did,” said Hal Eddins, a money manager with Capital Investment of Raleigh. “Microsoft is not going to be the Microsoft of the ’90s.”

But it isn’t going broke.

The software giant will still have $32 billion after the dividend.

BREAKING DOWN THE PAYOUT: On Thursday, Microsoft, led by chairman Bill Gates, will pay a special dividend of $32 billion — or $3 per share — to people who were shareholders. About $10 billion of that money will go to individual shareholders. Here’s a look at how those amounts stack up.

COUNTRY COMPARISON:

The total payout is bigger than the economies of some countries:

–Uganda: $29 billion

–Ecuador: $24.3 billion

–Costa Rica: $16.7 billion

–Cyprus: $12.7 billion

–Iceland: $10.4 billion

WHERE TO PUT THE MONEY: 100 shares could net $255 after taxes. Estimated worth in 10 years if invested in:

–S&P 500 Index fund: $792, assuming the fund increases 12 percent annually

–Microsoft shares: $661, assuming the shares increase 10 percent annually

–Certificate of deposit: $373, assuming 3.8 percent interest compounded daily

–Savings account: $296, assuming 1.5 percent interest compounded daily

–Under the mattress: $184, assuming similar inflation as from 1994 to 2004

WHAT $10 BILLION WOULD BUY:

–56 million copies of Red Hat Enterprise software

–40 million Apple iPod minis

–2 weeks worth of gas for every U.S. passenger vehicle

–5.3 billion hot dogs from Snoopy’s in Raleigh

CORPORATE COMPARISON: Here’s how $32 billion stacks up with the market capitalizations of several well-known corporations:

–Nextel Communications: $32 billion

–Caterpillar: $31 billion

–FedEx: $29 billion

–Ford: $26 billion

–Starbucks: $23 billion

THE COMPANY: Founded in 1975, Redmond, Wash.-based Microsoft is the largest software maker in the world. It employs more than 57,000 workers and has annual revenue of almost $37 billion. About 4.6 million investors worldwide own shares.

THE PLAN: Microsoft is undertaking a three-part strategy to deplete cash reserves that topped $64 billion in September.

The most attention-getting component is the $32 billion, one-time dividend that the company plans to pay out Thursday to investors as of Nov. 17.

But Microsoft also has doubled its annual dividend to 32 cents a share. And over the next four years, it plans to spend as much as $30 billion buying back stock.

DIVIDEND DEFINITION: A portion of a company’s profits distributed to shareholders, usually quarterly or annually. Sometimes companies declare special, one-time dividends, as is the case with Microsoft. A dividend is one way of increasing investor return. But it’s not always the best way. Some experts say that companies are better served by investing in new plants or products.

TOP SHAREHOLDERS:

–Bill Gates, Microsoft chairman

–Fidelity mutual funds

–Steve Ballmer, Microsoft CEO

–Barclays Global Investors

–State Street funds

WHO GETS THE MONEY:

–About $10 billion to individual shareholders

–About $22 billion to pension and mutual funds

–Bill Gates plans to donate his $3 billion to the Bill & Melinda Gates Foundation, which supports global health, education and public library work. In North Carolina, the foundation has granted at least $5.8 million.

Sources: Microsoft, Bloomberg News, SEC filings, U.S. State Department, staff research

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