Mea Microsoft culpa.

Mea Microsoft culpa.

Mea Microsoft culpa.

Moneybox
Commentary about business and finance.
Jan. 17 2003 2:47 PM

Mea Culpa

Mea Microsoft culpa.

Events of the past few days should provide definitive evidence that there is no back channel through which Slate contributors obtain information about its corporate parent, Microsoft.

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On Tuesday, Moneybox argued that the growing movement to exempt dividend payments from taxation would not encourage companies—and, in particular, giant technology companies sitting on giant cash piles—to start shelling out meaningful dividends quickly. My chief argument: To prevent dilution from the exercise of options, these companies have to use cash to buy back their own stock. "Regardless of what Washington decides about Bush's tax plan, shareholders of Intel, Microsoft, Dell, and other cash-rich technology companies shouldn't sit by their mailboxes waiting for fat dividend envelopes," I concluded.

Did Microsoft's announcement last night that it will start paying a 16-cent-per-share annual dividend set the table for a breakfast of my own words?

Yes, and no. Strictly speaking, the headline "Why Microsoft and Dell don't (and won't) pay dividends" is no longer operational, at least with regard to Microsoft.

Looking beyond the headline to the text, the fundamental thesis still obtains. First, the dividend envelope that Microsoft shareholders receive will be anything but fat. The company announced it would pay a dividend of 16 cents per share, roughly equal to 0.3 percent of Thursday's closing price. The S&P 500 collectively offers a dividend yield of 1.7 percent—more than five times Microsoft's rate.

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This dividend certainly won't represent a wholesale transfer of cash from corporate coffers into the wallets of shareholders. Microsoft closed the year with $43.42 billion in cash and short-term investments. This dividend will channel about $850 million, or less than 2 percent of the total, to shareholders.

What's more, Microsoft is something of a special case, even among giant technology companies. Its mammoth cash pile is nearly four times that of the next largest hoarder, Intel. And, unlike Intel, it doesn't need to spend oodles of cash annually on factories and equipment. Discussion of a dividend at Microsoft may have been in the works even before the proposed dividend tax cut. Microsoft chief financial officer John Connors called the timing "coincidental."

The Bush administration has argued, time and again, that encouraging companies to pay dividends would jolt the moribund markets back to life. But in this instance, offering shareholders a 0.3 percent annual yield, in and of itself, certainly wasn't enough to do the trick. Indeed, because the dividend news was accompanied by a less than exuberant earnings forecast, Microsoft's shares opened down nearly 5 percent this morning.

But if that 0.3 percent dividend isn't taxed, might not it spur more buying? If you're a high-income person in a high-income state, that 0.3 percent might get you something like a 0.6 percent real annual yield from Microsoft. Of course, as Michael Kinsley notes, the proposed tax treatment of dividends is incredibly complex. But investors can still do several times better than that with tax-free municipal bonds. For Microsoft shareholders, the dividend has the potential to provide only the tiniest sliver of total return.

Finally, one might ask, again, precisely how the higher dividends will stimulate the economy. Somebody with 100 shares—a $5,000 position—will get $16, enough to buy lunch for one at P.F. Chang's. The biggest beneficiary of this move, of course, is Bill Gates, who will receive a $99.5 million check from the company he founded. Will that make him more likely to spend more money at Home Depot? Chances are he'll save this pocket change, invest it—possibly overseas—or funnel it to his foundation.

Yes, this dividend was just a start. Consistently profitable companies routinely raise their dividends. But for the foreseeable future, Microsoft, like many other technology companies, will have to continue using cash to buy back stock to prevent dilution. At year's end, Microsoft had 5.35 billion shares outstanding and options out on another 846 million—a 15 percent overhang. In the most recent quarter, the company bought back 19.4 million shares for about $1 billion—that's more than it will spend on dividends all next year.

So, I'd revise the headline. It should read: "Why Dell and Microsoft still won't pay meaningful dividends." Most investors don't live on dividends alone. And the Microsoft dividend, welcome as it is, is pretty thin gruel.