Microsoft, which has a near monopoly on the software that runs the world's desktop computers, generated $10.4 billion in cash during its 2003 fiscal year alone. But its stock price has been little changed for almost three years, increasing pressure on the company to do something with its cash reserves that now total at least $56 billion.
With the bulk of Microsoft's legal troubles behind it, the company said it finally felt free to spend part of its stockpile.
The Redmond-based company plans to pay a one-time dividend of $3 per share--at a cost of $32 billion--and will double its annual dividend to 32 cents per share. Microsoft also said it plans to buy back up to $30 billion of the company's stock over the next four years.
The payout suggests Microsoft has, at least for now, put off plans to use the money to make a major acquisition to punch up growth. Microsoft disclosed last month that it had initiated merger talks with German software maker SAP, but called off the potentially costly deal after deciding it would be too complex.
The Microsoft plan dwarfs $1.9 billion in dividends that Metro-Goldwyn-Mayer Inc. paid its shareholders in April, including $1.4 billion to MGM's largest shareholder, billionaire Kirk Kerkorian.
Chairman Bill Gates said his share of the one-time payout, which amounts to about $3 billion, will be pledged to the Bill & Melinda Gates Foundation, the billionaire's philanthropic organization.
The monumental payout will give shareholders a quick gain and the buyback may help lift Microsoft's languishing share price. Microsoft stock, one of the nation's most widely held issues, has hovered between $23 and $30 since April 2002, despite steady profits and a growing pile of cash.
The news gave Microsoft shares a boost. The dividend and buyback plans were announced after the close of markets. Shares of Microsoft surged more than 5 percent in after-hours trading after closing the regular session up 37 cents at $28.32.
Microsoft withdrew an employee stock option plan in September because of stagnant share prices and instead began giving employees smaller amounts of stock outright. It also recently imposed cost-cutting measures amid efforts to keep profits up as its once-stellar revenue growth threatens to slow.
Microsoft chief executive Steve Ballmer defended the company's future prospects Tuesday, saying he believes the company has "some of the greatest dollar growth prospects of any company in the world. ... Now we have to execute well."
Goldman Sachs analyst Rick Sherlund said analysts might have favored that more money be spent on stock buybacks instead of the one-time payout, since that could help the stock price more in the long-term.
But, he said, "Shareholders are getting some immediate gratification from this."
The one-time dividend is subject to shareholder approval of an amendment that would prevent employees who hold stock options or stock awards from being put at a disadvantage.
The concern is that the stock price will drop on the day of the payout, so the company wants permission to come up with a plan to make up for that loss.
If that plan is approved, the special dividend would be paid out Dec. 2 to shareholders of record on Nov. 17.
The buyback and dividends will not affect the company's spending on new technology, executives said.
"We are going to continue to aggressively fund research and development and all the breakthroughs across all our businesses," chief executive Steve Ballmer said in a conference call with journalists and analysts.
Curt Anderson, Microsoft's senior director of investor relations, said the company had not yet worked out the details of how the massive stock buyback would work, or what the exact timing will be.
Microsoft had previously been hesitant to spend the billions it has been amassing because of fears the money would be needed for legal disputes. But the company said Tuesday that the large majority of its legal problems appear to be behind it.
Microsoft has settled many of its private antitrust claims, and it cleared its most significant U.S. legal hurdle when a federal appeals court unanimously approved the antitrust settlement the company negotiated about two years ago with the Bush administration. It still faces a lengthy court battle with the European Union, where it is appealing an antitrust ruling against it.
The company said Tuesday that it continues to believe it has good prospects for growing its cash reserves, but it has not provided any specific guidance on cash flows.
Microsoft is to report financial results for its 2004 fiscal year, which ended June 30, on Thursday.
Because Microsoft continues to add billions in cash reserves each year, analyst Charles Di Bona of Bernstein & Co. said the amount that Microsoft plans to spend over the next four years will still leave it with a nice cushion of cash. That means the company could still pursue an acquisition or be prepared for an unforeseen event.