Microsoft Shareholders to Get Special Payment

Sometimes the mattress is too small to hide all of one's cash. Microsoft has been sitting on piles of it for a long time, and finally, the company recognized that it needed to recycle this wealth. Rather than buy another firm in a foolish M&A endeavor, the big shots at Microsoft decided to give the money back to the shareholders -- to whom it really belongs anyway. There is a lesson for other businesses in this -- if the board can't find a way to invest cash that will improve shareholder value, give them their money back and let them decide what to do with it. It's called a free-market solution.

Microsoft generates $1 billion in cash each month (which in itself is enough to make one load a Linux OS on the home computer) so it won't run short of operating capital. But the $3 per share dividend is only part of a $75 billion give back. It is also doubling its regular dividend, it will buy back $30 billion in stock over the next four years. If the market objected to the idea of reducing the cash position, it had a funny way of showing it -- the stock price rose 5% in after-hours trading following the announcement.

Once upon a time, back when Americans made cars and TVs, there was something called a dividend investor. This was a person who bought stock not because its price would go up (although that was good, too) but rather because the business generated profits and paid them out to shareholders. Then, speculators moved into the market. They didn’t' worry about dividends ("the government taxes the money twice" they misinformed), they wanted to make their money on something else, on a rise in the price. As any economist can attest, rising prices don't automatically mean profitable companies. Asset inflation is not the same as profitability, and stock market bubbles arise from such inflation (fascinating that investors never complain about inflation when the asset they hold rises relative to the dollar).

If the American stock market in the 1990s had more dividend investors, the tech bubble couldn't have happened. How could a start up company's stock quadruple without revenues, let alone profits? And without stock price inflation, there would have been less room for fraud, for technology in search of an application, and for nonsensical business transactions based on stock values rather than business needs.

Microsoft's plan is just $12 billion less than the Bush administration's request for the Iraq war. It is worth almost as much as the child tax credit American families received. In short, it is a huge amount of money, and it sets a precedent for other firms to start paying or increasing their dividends. This, in turn, may make investors look at pay-outs when they invest, which undermines speculation. Microsoft may have done a good deed for the economy as a whole here -- although Linux still deserves serious consideration.


© Copyright 2004 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.


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