Can you make an extra ordinary profit from the dividend payment announcement made by Microsoft? In less than 500 words, discuss all issues that are related to dividend theory and efficient market theory found in your text.
Microsoft shares the 2 The software giant finally decides to turn over some of its cash to investors. Does the prospect of a $32 billion dividend make the stock a buy? by Adam Lashinsky MICROSOFT IS HANDING OUT money again, and this time share holders have reason to celebrate. That's because the payout is headed for their bank accounts rather than to the many companies and governments that have taken the software giant to court in recent years. Tempting as that cash may be, however, it's not the best reason to own the stock. (Don't even think of trying to game the one-time $3-per-share dividend the company declared in late July, to be paid in December. More on that below.) Instead, Microsoft (MSFT, $28) is worth a look today despite its cash distri- butions, not because of them. In short, if there's hope for the stock -and there is-it's because Microsoft is signaling that it's ready to get back to business after a long stretch of turmoil, growing pains, and litigation. into new ventures. But a funny thing happened to Mi crosoft, the investor. Even after pouring billions into cable invest- ments, basic research, and mass-mar- ket product launches like MSN and Xbox, the company has little financial return to thanks to its monstrously profitable Win- show for its efforts. At the same time, dows operating system and Office ap- plications businesses, the company's cash kept growing. At the end of its recent fiscal year Microsoft had $60 billion in cash and The company has been hoarding its cash for years; when pressed, Chairman Bill Gates and CEO Steve Ballmer would say they needed the reserves as a cush- ion against legal judgments and to plow Trailing the pack 160 140 120 100 grand, three-pronged gesture: It declared a special dividend of $32 billion to be paid to shareholders of record as of mid- November, doubled the annual dividend again, to 32 cents and announced a $30 billion stock buyback. In all the company ndex 3002 100 Nasdag Microsoft claims it'll holders' pockets-all the while reducing shares outstanding, which will boost carnings per share. Does that mean you should buy some shares before Now 17, the record date for Microsoft's special dividend? Definitely plow $75 billion into share- 830 2002 2003 2004 short-term investments. Consider that only not, if you're just after some quick cash 38 companies traded on U.S. stock ex Markets are exceedingly efficient at pric- changes have market capitalizations big- ger than 560 billion; and of course, no company has anything like that much cash. ing in special events, and buying just before the payout date won't do you any good because the stock Microsoft took a baby step toward will almost certainly decline by letting go last year by declaring an 8S3 immediately afterward. The cents-per-share annual dividend, which fact that the market largely yawned it subsequently doubled. Then, in late at the dividend declaration shows that July, it rectified the imbalance with one investment pros don't see this as an op- portunity. "I don't think an individual investor should try to arbitrage this divi dend, says Tony Ursillo, a tech stock an- alyst with fund complex Loomis Sayles in Boston, a Microsoft sharcholder That's a lot of work that you have to get right Nor should you buy Microsoft in the hope that it can return to its glory days. Growth has been lacking at the software giant since the bubble burst four years ago; its recent sales and amings growth charts might be mis- taken for those of a washing-machine maker. The problem is that Microsoft has gotten so big projoctod 2005 sales: almost S39 billion-that it needs enor mous gains to make an impact. And its shares aren't cheap. Subtracting out the value of the near-term cash payments, the stock trades for about 23 times estimated coming-year earnings. The S&P500 index by comparison, is worth about 17 times fore- casted 2005 earnings Even so, there's a clear case for buying the stock. Not only is Microsoft far more profitable than the typical big company operating margins run 25%-it still has a dominant position in a far-from-mori-2 bund industry. You've got a com- pany that over a long periodof time is going to grow earn-B ings by 12% a year, roese s clt oti amanath Raising the bar Charles DiBona specialize in security software Where will that growth come from? Some are calling Micros Microsoft has a spate of new products on the new widows-and-orphans the way, notably next year's Yukon server stock, but that's not quite right software, followed in 2006 or 2007 by AT&T (which just announced Longhorn, the long-awaited overhaul of plans to give up on its consumer Windows. Longhorn in particular repre business) was once the ultimate sents the company's next big opportunity example of such a safety stock. because Microsoft could use it to in- But to fit that description in crease its revenues from customers who gone days, a stock needed a take out continuing subscriptions for soft- market-beating dividend and a ware and services. "It could be a huge protected monopoly. Even af home run," says Rob Gensler, who owns ter sweetening its regular puay Microsoft in his T. Rowe Price Global out. Microsoft yckkonly 1.3% Technology fund. The bigger Microsoft gets, the tougher it is to grow 50% ft Microsoft revenue growth 40% by- 20% 10% cal 93 95 2000 05 (subtracting the value of the pecial divi prospects combined with some income The ultimate reason for confidence in with panies-especially in the tech sector-it faces formidable threats, namely the the dividend news. In soon, especially with so much of its bad be more useful to compare Microsoft with ing earnings report-further p dend), compared with an average of 1.7% Is Microsoft a sure thing? Of course Microsoft is that unlike many other com for the S&P 500 As for its monopoly, it not. Otherwise it would have shot up on isn't likely to come unhinged anytime open-source software movement It might then fell back after a mildly disappoint- news behind it. Says Dane Lewis, portfo vencrable blue chips like Ge lio manage Francisco firm with a small position in Mi dominat proof that ric plenty of Microsoft skeptics remain. "You nd Altria well-managed businesses that always want to buy stocks during periods r with Crosslink Capital, a San e their industries and throw off of transition and uncertainty," says soft: "They've gotten the litigation out tons of cash. By upping its dividend- T. Rowe's Gensler.-If you believet of the way, and I think you'll see them be more increases are expected-it's also can pull it of far more aggressive now, especially on ac- bringing in a new type of investor, the term stock quisitions." For one thing, Lewis expects kind who wants reasonable growth Repoter Assocate Wiltried E k-Dorna
