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JANUARY 17, 2003 NEWS ANALYSIS Microsoft's Dividend: A Sign of Maturity Though it's small by Colossus of Redmond standards, the cash payout says a lot about how Gates & Co. sees itself these days
Even with the recent Bush Administration proposal to eliminate taxes on dividends, the about-face is startling. Gates and Ballmer are as paranoid about threats to their business as they come, and they've always rationalized the cash hoard, which now tops $43 billion, as a cushion against rivals. It gives Microsoft the ability to make multibillion investments and acquisitions without batting an eye. Plus, Gates & Co. always wants to ensure it has enough cash to settle or pay off any judgments in the myriad of litigation against it. And since Microsoft's stock continues to outperform most of its rivals, it doesn't really need the boost that a dividend will give. "EXTREME AMOUNT." So why the reversal? Mostly because the cash hoard simply got too big. Microsoft's twin monopolies -- the Windows operating system and the Office application suite -- fuel a business that kicks off $1 billion a month in free cash. Sounds like a problem most companies would die for. Yet, shrinking interest rates kept Microsoft's returns on all that cash tiny. "They have an extreme amount of cash that's dragging down the return on equity," says Robert Schwartz, an analyst with Thomas Weisel Partners. What's more, as the litigation clouds have begun to lift, Microsoft's need for a massive stash has dissipated as well. "We felt we had better clarity" on the remaining legal issues, says Microsoft Chief Financial Officer John Connors. In November, a federal judge approved the settlement of the Justice Dept.'s long-running antitrust litigation against Microsoft. And on Jan. 10, the Colossus of Redmond reached a separate $1.1 billion settlement with consumers in California who accused it of violating the state's antitrust laws. It still faces many legal battles, including antitrust claims by the European Union and rivals Sun Microsystems (SUNW ) and the Netscape unit of AOL Time Warner (AOL ) that could reach into the billions of dollars. But it's becoming increasingly clear that those claims won't sap Microsoft's cash reserve. NOT A KID ANYMORE. The dividend also speaks volumes about how Microsoft views itself these days. One reason Gates and Ballmer resisted a payout for so long is that they've always had a hard time thinking of the company -- even as it grew to 50,000 employees and $28 billion in annual sales -- as anything but the feisty startup they created more than two decades ago. And startups don't issue dividends. They reinvest the money into new projects. In the last year, however, Ballmer has worked hard to put management structure and business processes in place to help Microsoft mature. A dividend is another step in that process. "Paying a dividend speaks to the end of the growth and the beginning of maturity," says Banc of America Securities analyst Bob Austrian. Even so, shareholders will be receiving a piddling amount, a "token dividend" in Austrian's view. It amounts to 0.3% of Microsoft's stock price. That's less than other tech companies with dividends such as Intel (INTC ), whose dividend is about a 0.5%, and IBM's 0.7%. The annual cost to Microsoft is a mere $870 million, less cash than it amasses in a month. Microsoft CFO Connors suggests the payout would likely increase over time. "You could probably characterize our dividend as a starter dividend," he says. THE BIG WINNER. To shareholders, the message was more important than the amount. "I'm pleasantly surprised," says Chuck Jones, vice-president at Stein Roe Investment Counsel, which counts Microsoft among the largest holdings in its $8 billion portfolio. Many mutual funds have rules that preclude them from investing in companies without dividends. Now that those investors can buy Microsoft shares, Jones expects the price climb. The shareholder who benefits most is, of course, Bill Gates. His first dividend check: nearly $100 million. Even for a multibillionaire, that's a nice return on investment -- and it provides one less shareholder question for him to answer next November.  By Jay Greene in Seattle Edited by Douglas Harbrecht Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | JANUARY [an error occurred while processing this directive] |
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