The traditional model and measures of what it means to "return cash to shareholders" doesn't work. Shareholders aren't paid to wait but bribed to stay. It's time to shatter the mold and start fresh.
No one has a better combination of liquidity, cash flow and horrid investment track record than Microsoft (MSFT). The Dell (DELL) transaction is 'exhibit A' in the case for Microsoft to stop messing around and give shareholders what they really want: cash.
(See Jeff Macke and The Reformed Broker Josh Brown discuss Microsoft, Dell and dividends in the attached video.)
Dell Deal and Questionable Investment Decisions
With the Dell deal Microsoft went into the vendor financing business. The price was $2b plus the enmity of every PC and Tablet maker on earth that isn't Dell. The investment gives Microsoft no control over Dell operations and no equity.
Microsoft's marriage to Dell had to come as a delightful surprise to Google (GOOG), which would love nothing more than to partner with Lenovo (LNVGY) and Hewlett-Packard (HPQ). Those two PC competitors hold control more than 30% of the shrinking PC market compared to Dell's 10.7%.
As of the end of last quarter, Microsoft had nearly $70 billion in cash and short term securities, a stack that grows by about $2 billion a month. More than half of that stack, some $40 billion is buried U.S. Government securities. At current rates Microsoft would get a better ROI by making it rain in nightclubs.
In the last 36-months, Microsoft stock has declined 10% while the S&P500 has risen over 30%. With shareholder friendly opportunities like that who needs a terrible fund manager?
A Change for Microsoft
The goal of a public company isn't piling up as much cash but adding value for investors. it's a point that seems to have been lost somewhere along the line.
The solution for a company with a huge money hoard, great cash flow and no growth is relatively obvious: Microsoft needs to raise it’s dividend to levels no one else can touch. A yield of 10% would do the trick.
If they pull it off Microsoft will have proven itself a disruptive force for the first time in a generation.
The Back of the Envelope:
Stick with me for a minute. The numbers actually work.
At current prices, a 10% yield amounts to $2.73 per share per year; roughly 68-cents per quarter. With 8.38 billion shares outstanding the payout would be $5.7 billion per quarter or $22.7 billion per year. Huge, gargantuan numbers, but Microsoft can swing it.
Microsoft is already paying $7.6b a year in dividends, meaning $15.1 billion per year has to be found to get to a 10% yield. Here’s a quick way to come up with the dough:
- Eliminate Share Buybacks
Microsoft spent an average of $8.8 billion per year on buybacks in the three years ending last June. The return on investment is very close to zero, including the assumption of unpaid dividends. Shareholders don't need Microsoft investing in its own shares.
Stop buying shares of Microsoft. That leaves a total of $6.3 billion per year.
- Reduce Outside Investments
In the year ending June 29th of last year, Microsoft spent roughly $12 billion on outside investments. The company just spent 1/6th of that for a non-voting stake of the #3 player in a shrinking industry. Given the company's investing track record reducing outside investments, taking that number down to $8 billion a year might actually help.
That leaves $2.3 billion per year needed for increased dividends and we haven’t touched $2.3 in CAPEX, $2.5 billion in R&D or $5.5 billion in SG&A (a 36% increase over 2011). Microsoft has gotten soft. It can either tighten its belts to find the $2.3 billion or simply pay out $20.4 billion a year and “settle” for a 9% yield.
The point isn’t 10% but giving investors safe yield in a world where junk bonds are kicking out less than 7%. It’s time for cash-rich companies with no growth to act like what they are; mature companies with largely dwindling assets.
Becoming one of the highest yielding companies in the S&P500 would make Microsoft a game-changer for the first time since the 80’s. It’s long past time for investors to demand it.
- Investment & Company Information