IN THE MONEY: Microsoft's Dividend Isn't Such A Big Deal
21 Jan 07:30
By Michael Rapoport
A Dow Jones Newswires Column
(This column was originally published late Friday.)
NEW YORK (Dow Jones)--So Microsoft Corp. (MSFT) is finally going to start
paying dividends. Whoop-de-do. Big deal.
To be fair, let's acknowledge right off the bat that Thursday's announcement
of a 16-cents-a-share annual dividend represents at least a baby step in the
right direction for the software behemoth, which has long been under pressure
to share some of its enormous cash hoard with its shareholders. Microsoft's
dividend yield - the annual dividend as a percentage of the company's stock
price - may be a paltry 0.3%, but that's better than zero, which is what
Microsoft's dividend and yield were before and what the dividends and yields
for many of its technology-company brethren still are.
But a little number-crunching reveals that this move to institute a dividend
is something less than a big, dramatic step on Microsoft's part. Because it
appears that Microsoft will be paying out considerably less of its available
cash than do some other major tech companies that are already paying dividends.
You could easily make the argument that to be equitable, Microsoft should be
paying its shareholders a lot more.
To see what I mean, compare Microsoft with two other tech giants:
International Business Machines Corp. (IBM), which has long paid dividends, and
Intel Corp. (INTC), which started paying dividends recently.
Microsoft's 16-cent dividend means that it'll pay out about $855 million to
shareholders this year. Sounds like a lot - but given Microsoft's size and the
huge amount of cash that flows into the company, that's a pittance. Microsoft
had operating cash flow of $17.3 billion in the 12 months ended last Sept. 30,
so that $855 million would be about 4.9% of annual cash from operations. IBM,
which pays dividends at an annual rate of 60 cents a share,pays out about
$1.01 billion, or 7.1% of its trailing-12-months operating cash flow. Intel,
which pays 8 cents a share annually, pays out only $530 million, but that's 6%
of its operating cash flow. (IBM and Intel haven't yet provided information on
cash flow for the December quarter, so the September figures are the most
recent available with which the three companies can be compared.)
When capital expenditures are factored into the mix, the gap between
Microsoft on one hand and IBM and Intel on the other only widens, because IBM
and Intel have much higher capex than Microsoft, and so it cuts more deeply
into the free cash flow they have available to pay dividends. As a percentage
of free cash flow - operating cash flow minus capital expenditures - Microsoft
will be paying out only 5.2% of its $16.5 billion in trailing-12-months free
cash flow as dividends. By comparison, IBM pays 10.4% of annual free cash flow;
Intel pays 12.4%.
Looking at the companies' respective cash positions makes the point with
still more force. Microsoft has $43.4 billion in cash on its balance sheet,
meaning that it'll be paying out just 2% of its cash hoard each year. Intel has
$10.8 billion, and it's paying out about 5% a year. IBM has $6 billion in cash,
and it's paying out nearly 17%.
And Microsoft's attempts to suggest that its research-and-development
expenses are something it needs to watch before boosting its dividend aren't
entirely convincing either. Microsoft's R&D costs were 13.1% of its revenue in
the most recent quarter, but Intel's were 14.2%. (IBM's, admittedly, were only
5.1%.)
Even from a yield standpoint, IBM and Intel are much better than Microsoft,
though all three fall well below the norm. Compared with Microsoft's yield of
0.3%, IBM's is 0.7% and Intel's is 0.5%. (The indicated dividend yield of the
stocks in the Standard & Poor's 500 is about 1.8%.)
It's also worth noting that in approving the dividend, Microsoft's board was
effectively giving its chairman and chief executive a little extra
walking-around money. Chairman Bill Gates stands to get dividend payments of
about $98 million a year based on his current holdings in Microsoft stock.
Chief Executive Steve Ballmer will get about $38 million a year, and Microsoft
co-founder Paul Allen, still a major shareholder, will get about $22 million.
Rachel Wayne, a spokeswoman for Microsoft, reiterated the statements of Scott
Boggs, Microsoft's corporate controller, during the company's conference call
Thursday, when he characterized the 16-cent dividend as "a starter dividend. If
you stack us up against other big tech companies, we're right in the ballpark,
and it is a good place to start."
Of course, Microsoft, IBM and Intel are three very different companies with
very different emphases, even though they're all lumped under the rubric of
"technology." And Microsoft has faced significant challenges from the
government to its very future that the other two haven't (though IBM had to
operate under the restrictions of a longstanding antitrust decree until just a
few years ago).
Still, this payout seems such a relatively inconsequential portion of
Microsoft's cash that you have to wonder why the company didn't institute a
dividend long ago - and why it isn't higher now.
-Michael Rapoport, Dow Jones Newswires; 201-938-5976;
michael.rapoport@dowjones.com
(END) Dow Jones Newswires
01-21-03 0730ET |
