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Sunday, November 07, 2004 - Page updated at 12:00 A.M.

It's time for the big Microsoft payout

By Brier Dudley
Seattle Times technology reporter

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During the coming season to give thanks, Microsoft is giving investors the biggest thank-you in the history of corporate America — up to $76 billion to sweeten the value of its stock.

If shareholders approve the plan at their annual meeting Tuesday in Bellevue, the gratitude will commence with a $3 per share special dividend in December that will cost the company $32 billion. The payout — equal to about 10 percent of the stock's Friday closing price — pales next to the stock's spectacular growth in the 1990s. But it finally gives shareholders some of the cash Microsoft accumulated while turning hefty profits year after year, even as the shares have stumbled since the early 2000 technology downturn.

"Investors hung in there and supported us and had faith we would come through for them in the long run," said Curt Anderson, director of investor relations.

The special dividend is the centerpiece of a three-part plan Microsoft announced in July to increase the stock's value to investors. The plan also doubles the stock's regular dividend to 32 cents a year and buys back up to $30 billion worth of stock over four years.

Microsoft shouldn't suffer much from the payouts. Its cash pile has been growing more than $1 billion a month, to $64.4 billion as of Sept. 30.

The state of Washington may be grateful if the dividend helps the economy during the holiday season. Some retailers and charities are hoping shareholders will spend or donate at least some of the proceeds.

What if my mutual fund has Microsoft shares?


Microsoft's special dividend will benefit people who own shares indirectly through mutual funds, but it's unlikely to appear as a windfall.

Funds will distribute or reinvest the money, depending on the type of fund and how it's set up.

The $3 payout won't cause a spike up or down in a tax-deferred 401(k) fund that has Microsoft stock, for instance. It would simply be rolled into the fund, according to Adam Banker, a spokesman for Fidelity, the largest institutional investor in Microsoft.

"It goes into the net income of the fund. ... You're simply reinvested in that much more fractional shares in a fund," he said.

Taxable accounts may distribute the dividend to shareholders, proportionate to their shares in the fund and the fund's holding in that stock, he said.

Seattle Times technology reporter Brier Dudley

Last week, the Seattle chapter of the Nature Conservancy made a subtle fund-raising pitch to Microsoft shareholders in a mailing sent to chapter members. "It could be that you've received an unusual dividend this year and are wondering how to spread your good fortune," it said.

Spokeswoman Leslie Brown said the group is hopeful that it will have a good year of fund raising, but it's unsure whether the Microsoft dividend will help, especially since its research found that many shareholders already have formal giving plans in place.

"There's not an average Microsoft stockholder," she said. "There are some who are middle class and will use their dividend to maybe pay off some bills or buy a special Christmas present, and there are some who are very wealthy. The people who are very wealthy usually have pretty well-thought-out philanthropic plans and have figured out what their philanthropy for the year will be."

The dividend will help at least one local charity. Microsoft Chairman Bill Gates pledged the $3 billion he'll get to the Bill & Melinda Gates Foundation.

Big cash infusion

As of August, Washington residents held 1.8 billion shares of the company, or about 16 percent of the total. Excluding the holdings of Gates and Chief Executive Steve Ballmer, state residents held 300 million to 400 million shares, Anderson said.

That means the $3 dividend will funnel $900 million to $1.2 billion in cash to state investors when it's paid on Dec. 2. It's payable to shareholders of record on Nov. 17, but because there's a three-day settlement period, the last day to buy shares and get the $3 is Friday.

For perspective, workers in King County received total wages of $13 billion in the last three months of 2003.

State economists expect most of the dividend proceeds to be reinvested and the economic impact to be small or minimal.

One reason is that they see a shift in the way Microsoft distributes profit — giving investors a bigger share. In years past, the biggest beneficiaries were employees, who made millions from generous stock options. They made roughly $30 billion on options during the 1990s, supercharging the state's economy.

Stock options were halted last year and replaced with a program that gives employees outright stock, but in smaller amounts. That plan was announced in July 2003; a year later the company unveiled the special dividend and buyback program.

Microsoft is taking steps to protect employee stock holdings from the special dividend, which will lower the stock price by $3. Nasdaq will adjust the price so the stock will open Nov. 15 at a price $3 lower than it closes on Friday, Anderson said. The company plans to adjust the value of stock awards and outstanding options to compensate.

That's the adjustment that shareholders are being asked to consider on Tuesday.

Shareholder input

Shareholders are likely to approve the proposal, and the company will also win credibility with large investors for seeking shareholder input on the changes, said Patrick McGurn, special counsel at Institutional Shareholder Services, a Rockville, Md., company that advises big investors on proxy voting.

McGurn said there was "shareholder outcry" last year when Microsoft dropped its stock-option plan without a vote.

"It was less about the substance, what they did last year, than that the company just went ahead and did it without asking shareholders for input into the process," he said. "It was as much of anything an accountability issue for the board of directors."

Wall Street may have grumbled less if Microsoft stock had been doing better.

Over the past five years the stock has performed worse than the Standard & Poor's 500 Index and, excluding 2002, worse than the Nasdaq computer index.

Analysts expect the stock to continue its modest performance through 2005, then pick up in 2006 and 2007 after the next version of Windows is released and businesses such as Xbox are expected to become profitable.

Microsoft's own forecast suggests that its current fiscal year, ending June 30, won't be a barnburner. It expects 6 percent sales growth, compared with 12 percent in fiscal 2004, largely because of slowing computer sales.

Higher dividends ahead?

Yet some believe Microsoft may still increase its regular dividend even above 32 cents next year.

"We would not be surprised to see that," said S&P equities analyst Howard Silverblatt. "They obviously have the ability to increase their dividend without negatively impacting their day-to-day operations or their growth potential. Their yield is low — it's high for a technology issue, but it's low compared to most other companies."

At roughly 1.1 percent, the regular dividend yield lags behind the 1.49 percent average of S&P 500 companies, and the 1.98 percent average of dividend-paying companies on the list.

Microsoft's dividend will also stand out less as more and more companies give cash back to shareholders. The number that do declined since 1980, but the trend has reversed. Last summer, a record number of dividends were initiated and 231 companies increased their payout, Silverblatt said. He expects even more next year.

A key reason is last year's the federal tax cut passed last year that reduced the tax rate on dividends by about 20 percentage points — from around 35 percent to 15 percent. President Bush's re-election increases the likelihood the cut will remain in place until, and perhaps beyond, its 2008 expiration date.

Over the past year, the dividend tax cut saved investors $26 billion, Silverblatt said. It also makes Microsoft's special dividend even more attractive. Individual Microsoft investors will save $2 billion on their $10 billion payout, he said.

Microsoft has hinted in the past that its regular dividend may increase, but one of its finance executives was mum at an RBC Dain Rauscher investment conference Thursday in Seattle.

Scott Di Valerio, Microsoft's corporate controller, said the company continually looks at options for its cash, but would not comment on a dividend increase.

Cash flow in fiscal 2005 will be "maybe a click higher" than 2004, perhaps $14 billion or $15 billion, he said.

Cash for acquisitions

Microsoft also uses its cash to develop new products and buy technologies and companies. In the past four years it spent $5 billion to buy 46 companies, Di Valerio said.

Several investors in the RBC Dain Rauscher audience said they have come to terms with Microsoft's slower growth and appreciate the dividend.

Marshall Will of Stanwood said the payout helps because he no longer considers Microsoft to be a growth stock.

"Part of that is just the fact we're getting less gee-whiz with technology," he said. "Back in the '90s it was a sexy thing. Now it's just a part of life. It's like the energy market."

Will is keeping his Microsoft stock as a safe-harbor investment that compares favorably with bonds.

"I look for other places to make more return — Microsoft is becoming more of a slow-growth, dependable investment," he said.

Seattle investor Jim Abernethy is concerned about the stock price, though he's pleased with the dividends.

"That part's great," he said. "I'm sure not happy with the way it hasn't moved at all."

Abernethy has owned Microsoft for 10 years and he's sticking with it "because it's such a good company."

"Even though it hasn't moved, we're still ahead of the game," he said.

Brier Dudley: 206-515-5687 or bdudley@seattletimes.com

Copyright © 2004 The Seattle Times Company

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