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Microsoft Plans $32 Billion Payout for Shareholders

Posted on: Wednesday, 21 July 2004, 06:00 CDT

Microsoft plans $32 billion payout for shareholders

Firm also will double its quarterly dividend

By GARY RIVLIN New York Times

Wednesday, July 21, 2004

Microsoft, with more than $50 billion on hand, announced Tuesday that it would bestow on its shareholders a special one-time dividend of $3 a share, a payout worth $32 billion.

Although other companies have paid special dividends, the size of Microsoft's payout seems far and away the largest cash grant in corporate history.

Bill Gates, the company's chairman and largest shareholder, will receive $3.3 billion of that special dividend. Gates, already the world's richest man, also will see an extra $180 million a year from an increase in the quarterly dividends, also announced Tuesday.

Gates already has pledged that he will give all of the one-time dividend to The Bill & Melinda Gates Foundation. The contribution will increase the size of the foundation's assets by 11% to $30 billion, making it roughly three times as large as the next largest foundation in the United States.

In addition to the special dividend, Microsoft said it would double its quarterly dividend from 4 cents a share to 8 cents a share, a move that translates into an additional $3.5 billion a year paid to shareholders.

The company also announced that it would buy back as much as $30 billion of its stock over the next four years.

"The magnitude of the action being taken here is breathtaking," said Rick G. Sherlund, an analyst with Goldman Sachs.

A large cash distribution to shareholders had been expected, according to Wall Street analysts, given investor pressures. Microsoft shares soared in the 1990s but have been treading water in recent years as the company's revenue growth has slowed.

At the same time, there has been mounting pressure on the company to do something about its mounting hoard of cash, which has ballooned to $56 billion. The $32 billion payout, which will be paid in December, will leave the company with more than $20 billion on hand.

"This has been a low- to medium-grade issue for at least a year now and a high-grade issue in the last couple of months," said Charles J. di Bona, an analyst with Sanford C. Bernstein & Co. "Most investors would ask what took so long."

Microsoft generates roughly $1 billion in extra cash each month. "I don't know any company out there that generates that kind of excess cash," di Bona said.

Fifteen months ago, Microsoft announced that it would pay a quarterly dividend, a rare decision by a technology company. That decision was cast as tacit acknowledgment that Microsoft was making the transition from hot stock to a more steady, investor-friendly blue chip stock.

The company's decision to raise its quarterly dividend "puts us on course to be one of the largest dividend payers in any industry," said John Connors, Microsoft's chief financial officer. According to Standard & Poor's, the move will make Microsoft the 10th largest dividend payer in the S&P 500.

The company invests its excess cash in a variety of investment vehicles, from short- and long-term bonds to mortgage-backed securities and holdings in individual stocks, Connors said. The company has earned roughly 7% a year over the last several years on its surplus cash.

Analysts had expected Microsoft to announce an aggressive stock buyback plan and to increase its quarterly dividend payment. The surprise in Tuesday's announcement was that the company was spending over half its cash on hand in a one-time giveback.

"The story here isn't that they're doing something about all that money they have," Sherlund said. "It's that they're being big and bold in how they're choosing to spend it."

Microsoft announced its plans after the close of the markets. Shares of Microsoft had risen 37 cents to $28.32 at the market's close. In after-hours trading, shares spiked more then 5%, to $29.88.

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