NEW YORK – With Microsoft Corp. shareholders on the verge of collectively receiving $32 billion in cash from the software maker’s special $3 dividend, investors are wondering what’s ahead for one of Wall Street’s most popular stocks.
The July 20 announcement of the dividend ended years of speculation about Microsoft and its huge pile of cash. It also attracted new investors to the company’s stock.
But with the approach of the payout, there are already changes in the marketplace. Wall Street adjusted Microsoft’s price by $3 Monday to reflect the dividend, payable Dec. 3, which will go to shareholders of record as of Wednesday. The stock, a Dow Jones industrial, closed up 42 cents at $27.39 on the Nasdaq Stock Market after the “ex-dividend” adjustment.
“Once the stock goes ex-dividend … we will likely see a corresponding drop in share price,” said Jason Maynard, a research analyst with Merrill Lynch, who added that those investors who bought Microsoft specifically for the gain would drive the price lower.
By approving the special dividend, the company was trying not only to stir short-term interest in its stock after three years of flat share prices, but also to try to improve its long-term performance as an investment. The stock has declined steadily since Jan. 17, 2002, when it closed at $34.93. Since then, it has vacillated between $24 and $29 per share.
“Historically, stocks have paid their dividends and then they tend to move higher, especially if the trend of the market is somewhat perky,” said Jeffrey Saut, chief investment strategist at Raymond James Financial Services. “There were a number of automated trading programs in the 1990s that bought stocks right after outsize dividend payments. If stocks didn’t have a natural tendency to rise after a dividend, the program wouldn’t have worked.”
Interest in Microsoft shares has been undeniable since the dividend was announced. The stock climbed 54 cents the day after the announcement, on volume of 201.6 million shares. This past Friday, the last day investors could buy the stock and become eligible for the dividend (factoring in the time it takes for a transaction to clear), 162 million shares changed hands – more than 21/2 times its daily average.
The stock has climbed 5.8 percent from its July 20 closing price of $28.32 to Friday’s close of $29.97.
The dividend, analysts said, has made Microsoft more attractive to mutual funds and other large investors who might have been disappointed with the company’s lackluster share growth the last three years. It also repositions Microsoft as more of a blue-chip value stock, since its impressive profit and share price growth of the 1990s has lessened considerably since the dot-com bubble burst.
However, the dividend also raises questions about the company’s business strategy going forward, as most companies with large cash reserves are actively looking for acquisitions or major product launches. The fact that Microsoft has chosen to issue this dividend could mean that it simply didn’t know how best to invest the $60.6 billion in cash and short-term assets it had on hand before the dividend was announced.
“When companies pay this kind of outsize dividend, it tends to mean that the outsize growth they’ve experienced in past years is waning,” Saut said. “I’m not sure that you can say Microsoft is a value stock quite yet, but its growth isn’t what it was.”
While Microsoft’s short-term prospects look good – and shareholders will certainly be happy – the company’s longer-term outlook remains cloudy. The company has not had a major release of its hallmark desktop operating system, Windows, since 2002, and the next version is not due to be released until 2006. The 2003 version of its Office productivity suite has still yet to make a major dent in a market dominated by older and less expensive versions of the exact same product.
The settlement
What Microsoft did: Paid $536 million cash to rival Novell Inc. to settle potential antitrust complaints over Microsoft’s alleged actions toward Novell’s Netware operating system, which competes with Windows software.
What Microsoft got: Novell pulls out of the antitrust case against Microsoft in the European Union.
What Microsoft missed: Microsoft and Novell fail to agree on payments for Microsoft’s alleged actions toward Novell’s WordPerfect word-processing software during the mid-1990s.
The settlement
What Microsoft did: Paid $536 million cash to rival Novell Inc. to settle potential antitrust complaints over Microsoft’s alleged actions toward Novell’s Netware operating system, which competes with Windows software.
What Microsoft got: Novell pulls out of the antitrust case against Microsoft in the European Union.
What Microsoft missed: Microsoft and Novell fail to agree on payments for Microsoft’s alleged actions toward Novell’s WordPerfect word-processing software during the mid-1990s.
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