By Chandni Doulatramani and Edwin Chan
(Reuters) - Microsoft Corp raised its quarterly dividend by 22 percent and renewed its $40 billion share buyback program, extending an olive branch to investors who are expected to grill its outgoing CEO on Thursday about a costly foray into mobile devices.
The surprisingly big hike takes Microsoft's dividend yield to around 3.4 percent, ahead of major tech corporations such as International Business Machines Corp and Apple Inc.
But it may not satisfy activist investment firm ValueAct Capital and its supporters, mainly other big investment funds, analysts said. Some investors held out hope for a bigger slice of the company's $70 billion cash hoard, now that ValueAct has an option to take a seat on the software giant's board and exert greater influence over the company.
ValueAct has not publicized its goals. But people familiar with the fund's thinking say it questions Chief Executive Steve Ballmer's leadership and the wisdom of buying Nokia Corp's handset unit to delve deeper into the low-margin hardware business, and that it wants higher dividends and share buybacks.
Microsoft's shares finished 0.39 percent higher at $32.93 on the Nasdaq.
"I expected ValueAct to push for a big lump-sum payment like they have in the past," said Fort Pitt Capital analyst Kim Forrest, who has not spoken with the fund.
"And this is Microsoft saying no."
A hotly anticipated investor meeting on Thursday will give shareholders their first chance to quiz management on who may replace Ballmer, who announced plans to retire within a year after ValueAct pressed for his ouster.
It is unclear how hard ValueAct pushed Microsoft to share more of its $70 billion cash hoard. ValueAct CEO Jeffrey Ubben declined to comment about Microsoft during an industry event in New York on Tuesday.
For years, investors have called on Microsoft to return cash to shareholders rather than invest in peripheral projects, and limit its focus to serving enterprise customers with its vastly profitable Windows, Office and server products.
This month, it announced plans to buy Nokia's phone business and license its patents for 5.44 billion euros ($7.2 billion), a hefty investment that some criticized as a foray into a field already dominated by Apple and Google Inc hardware and software.
Microsoft has lost almost $3 billion on its Bing search engine and other Internet projects in the last two years alone, not counting a $6 billion write-off for its failed purchase of online advertising agency aQuantive.
Investors want a clearer picture of where Microsoft's investments in devices will take the company in coming years, especially as its cash cows, Windows and Office software, come under attack from Apple and Google in the mobile market, and the likes of Evernote and Box begin to develop productivity software.
"They really need to address what Microsoft will look like in a few years, and what the end goal is," Forrest said.
ONE COMPANY TO RULE THEM ALL
Ballmer announced his move just weeks after unveiling a 'One Microsoft' vision focused on hardware and cloud-based services. But poor sales of the Surface tablet, on top of its years-long failure to make money out of online search or smartphones, have cast doubt on the plan.
One of the biggest questions hanging over Microsoft is who will take the helm once Ballmer exits, and whether the successor will hew to his vision. Several sources have said top investors in the company are seeking a turnaround expert from within or without, and have proposed CEOs like Ford Motor Co's Alan Mulally or Computer Sciences Corp's Mike Lawrie.
The Nokia acquisition also brings former, well-regarded Microsoft executive Stephen Elop, who had headed the Finland-based company, back into the fold.
Tuesday's dividend and buyback declaration will help appease some investors for the time being, analysts said.
Microsoft said it will raise its regular dividend, payable on December 12 to shareholders of record on November 21, to 28 cents per share and authorized a new share buyback program.
The 5-cent increase, worth about $400 million a quarter, was about 3 cents more than analysts had expected. The new share repurchase program, with no expiration date, would replace another set to expire on September 30.
Microsoft ranks fourth on Wall Street in terms of actual cash payouts, behind Apple, Exxon Mobil and AT&T Inc. In terms of dividend yield, it ranks fourth among U.S. information technology companies, lagging only Intel Corp, Seagate Technology and Microchip Technology Inc, according to S&P Dow Jones Indices.
"We view this as a further indication that things are changing at Microsoft with respect to corporate governance that we believe could benefit shareholders over the next six to 12 months," Nomura Securities analyst Rick Sherlund said in a note.
But Barclays analyst Raimo Lenschow had expected an accelerated or expanded share buyback plan. The slightly bigger-than-expected dividend increase may signal a willingness to bow to investors' demands.
"A major open question is the timeframe over which the company plans to utilize the new $40 billion authorization, as that will dictate whether the level of the annual buyback is changing," Lenschow wrote on Tuesday.
"While the size of the new buyback program appears on the lower end of investor expectations, which we had pegged at close to $50-60 billion, the lingering question around the timeframe of the program makes the comparison to expectations flawed."
(Additional reporting by Nadia Damouni, Sam Forgione and Svea Herbst-Bayliss; Writing by Edwin Chan; Editing by Saumyadeb Chakrabarty, Robin Paxton, Noel Randewich and Richard Chang)