Microsoft's policy for the last several years has been to boost the quarterly dividend in September in line with increases in operating income, which rose 23 percent in the latest fiscal year. While too big a payout might require Microsoft to incur a tax on cash held overseas, an overly modest increase would put the company at odds with investors clamoring for more. ValueAct has until Aug. 30 to decide whether to mount a proxy battle for representation on Microsoft's board.
"Microsoft has a target on its back," said Kim Caughey Forrest, an analyst at Pittsburgh-based Fort Pitt Capital., which manages $1.4 billion in assets, including Microsoft shares. "It wouldn't surprise me if technology companies that generate a lot of cash, regardless of where it's domiciled, would consider bigger dividend increases, because the activist investor has really come into play in the last 18 months, and not just at Microsoft."
ValueAct has been negotiating for a board seat, a request that Microsoft is considering, a person with knowledge of the matter said in July.
Microsoft, which has $77 billion in cash and investments, will probably raise its quarterly dividend by 3 cents to 26 cents a share, according to a Bloomberg projection that takes into account data such as the company's ability to pay and the dividend implied in the options market. Analysts are slightly less bullish, predicting an increase to 25 cents, according to the average of estimates compiled by Bloomberg.
Billionaire investor Carl Icahn is pushing Apple to return more of its $146.6 billion in cash via a buyback, and has fought for Dell to remain public and pay out money instead of going private in a leveraged buyout.
Tony Imperati, a spokesman for Redmond, Wash.-based Microsoft, declined to comment. Microsoft will hold an analyst meeting on Sept. 19 in Bellevue, Wash. ValueAct officials didn't return multiple requests for comment.
Microsoft's profit in the latest quarter missed analysts' projections by the largest margin in at least a decade as the company's Windows business shrank. Poor sales of the Surface tablet computer led to an inventory writedown.
Ballmer, who announced the biggest company reorganization in more than a decade in July, said on Aug. 23 that he'll step down as CEO within the next 12 months. The board has formed a committee to find his replacement from among internal and external candidates.
The software maker's board usually decides dividend matters at a meeting in September. Microsoft raised the quarterly dividend by 3 cents in 2012 and 4 cents in 2011.
This year's boost may be smaller, said Sid Parakh, an analyst at McAdams Wright Ragen in Seattle. Excluding a legal charge of $733 million, a $900 million Surface writedown and a $6.19 billion impairment charge in 2012, operating income rose less than 2 percent, which may prompt Microsoft to forgo a large dividend boost, he said.
The bulk of Microsoft's cash, about $69.6 billion, is held overseas, the company said in an annual filing. To spend that money on dividends, the software maker would have to pay taxes on money brought to the U.S. Microsoft and other companies have opted to issue debt.
"They will do some increase, but I don't know if it will be the same big increase they've done," said Parakh. "At the same time there is activist pressure, so could they lever up to do a bigger increase? Sure."
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