November 30, 2004

Huge Payout Puts Focus on Shareholders

MICROSOFT SHAREHOLDERS ARE due for a payout of epic proportions later this week, when the company issues a special dividend of $3 per share, or $32 billion total.

Then it starts to get interesting.

In deciding what to do with the cash, shareholders will be making choices that could ripple collectively through the economy and the stock market. Regional economists and Wall Street analysts will be watching closely to see what happens.

In general, however, the experts don't have big expectations.

Taken as a whole, the payout is a windfall, but the majority of the cash is expected to be reinvested in some form, not spent. As a result, economists envision relatively little impact on retail sales - despite the timing of the payout, at the beginning of the holiday shopping season.

If the effect is evident anywhere, it will be in the Puget Sound area, home to a disproportionate number of Microsoft shareholders. Excluding stock held by Microsoft executives Bill Gates and Steve Ballmer, the company estimates that about 300 million to 400 million shares are owned by people and institutions in Washington state. That means investors in the state will receive $900 million to $1.2 billion of the overall payout.

Proceeds will vary depending on the size of individual holdings, but as an example, someone who owns 1,000 shares would receive $3,000 from the payout, before taxes.

One key group to watch will be Microsoft employees, who number 28,000 in the region. They own shares of the company through a variety of programs tied to their compensation and benefits plans, including a stock option program that ended last year.

Because of their widespread Microsoft holdings, employees will probably be less likely than other shareholders to reinvest proceeds from the dividend back into the company, said Jeff Crosby, a Redmond- based senior financial adviser with American Express Financial Advisors, whose clients include Microsoft employees.

Some will no doubt put the money into other investments. But Crosby said he also expects many Microsoft employees to use the money to pay off debt, make down payments on new cars, buy furniture, and fund other "lifestyle purchases."

Overall, however, the Washington State Forecast Council expects only about 6 percent of proceeds from the special dividend to be spent, with the rest reinvested.

The inclination to reinvest will be driven in part by the fact that Microsoft's share price declined by roughly the size of the dividend two weeks ago, as expected, to reflect the upcoming payout. As a result, many people will want to put the money back into some type of investment to avoid reducing their overall portfolio value.

"This is really not a bonus, or a special gain," said Chang Mook Sohn, the state's chief economist.

Case in point: Microsoft employee Peter Durham, 37, a software design engineer who buys Microsoft stock at a discount through the company's employee stock purchase plan. Durham pointed out that the special dividend is essentially converting a portion of the stock's value into cash. He plans to use his proceeds from the dividend to buy additional Microsoft shares, effectively putting that value back into his own holdings.

"As tempting as it would be to consider it money from nowhere, it is money from somewhere," he said.

Institutional shareholders also are generally expected to reinvest the dividend in some form. Altogether, between individuals and institutions, that adds up to a huge sum of money going back into the market. And therein lies another twist.

If the money is spread broadly among a variety of stocks and other investments, the overall impact would be diluted across the market. But if large numbers of investors use the money specifically to reinvest in Microsoft stock, the increased demand for the shares could boost the company's share price.

"Probably most of it will be going back into technology," said Sanford C. Bernstein & Co. analyst Charles Di Bona, explaining that institutions would tend to direct the cash back toward the sector from which it came. "But the call on whether it goes into Microsoft or not is a lot more ambiguous. It's really hard to tell."

But expectations among analysts and investors are relatively modest.

"I don't think it would be a significant blip," said Alan Davis, analyst at McAdams Wright Ragen in Seattle.

There may be "a slight boost" in the share price as some investors use the dividend to buy more Microsoft stock, said Don Gher, chief investment officer with Bellevue-based Coldstream Capital Management, which manages about $550 million, including significant Microsoft holdings. However, Gher said, it's not the type of phenomenon that would send the stock soaring.

The special dividend, to be issued Thursday, is part of a broader, $75 billion plan to reduce Microsoft's cash balance by returning equity to shareholders. In addition to the special dividend, Microsoft has effectively doubled its annual dividend rate, and it plans to buy back as much as $30 billion in stock.

Microsoft Notebook is a Monday P-I reporter Todd Bishop. He can be reached at 206-448-8221 or [email protected]