Photo: AMagill via flickr
Microsoft’s latest earnings report should please investors in many ways: revenue growth above 10% in its core businesses, strong bookings, and a profit margin of above 20% in the segment containing the Xbox business, which used to be an infamous money pit.
But there’s one area where the sceptics may have a point. Microsoft has too much cash.
Despite buying back $4 billion worth of stock and raising its dividend 23% during the quarter, Microsoft had $44.2 billion in cash and short-term investments at the end of September. That’s up 20% from the end of June, and the highest number since September 2005, when it stood above $64 billion.
Microsoft paid a special one-time dividend of $3 per share in late 2005, which lopped about $30 billion from its cash hoard. But that dividend did nothing for the stock price, which simply dropped by $3.
The company has repurchased tens of billions of dollars worth of stock since 2005, but that hasn’t done much for the stock price either. And while it’s always fun to play the big-acquisition guessing game (Adobe? RIM?), Microsoft has reason to be gun-shy from the aborted Yahoo takeover, which turned out to be one of the greatest escapes in business history.
But what about dramatically increasing its regular dividend?
Assuming the stock opens around $27, where it sits right now in after-hours trading, that puts Microsoft’s annual dividend yield at about 2.3%. That’s about midway among the dividend-paying stocks in the S&P. Raising the dividend so Microsoft is near the top of the heap is affordable, reasonable, and could draw more value investors to the stock.
Of course, Apple now has more than $51 billion in cash and short-term investments, and it doesn’t pay a dividend at all. Nor does it plan to, as spelled out in its recent 10-K filing: “The Company anticipates that for the foreseeable future it will retain any earnings for use in the operation of its business.”
But Apple’s also growing a lot faster than Microsoft, and that’s reflected in its stock price over the last decade.