Microsoft Corp. said yesterday that it will issue dividend checks to common stockholders for the first time, a surprise move signaling that the software giant believes its expensive antitrust troubles are coming to an end.
Company officials said the board unanimously approved an annual dividend of 16 cents per share. The Redmond, Wash.-based company had previously responded to grumbling by investors about its cash reserves of more than $40 billion by saying it needed to keep the funds because of the uncertainty in its court cases, among other reasons.
"We now have more clarity on the legal front," Chief Financial Officer John Connors said.
The company's decision comes just weeks after President Bush proposed that taxes on stock dividends be eliminated to spur more investment in public markets.
Also yesterday, the tech powerhouse reported a net profit of $2.55 billion (47 cents per share) for its fiscal second quarter, which ended Dec. 31. That was up nearly 12 percent from $2.28 billion (41 cents) in the year-earlier period, and slightly exceeded Wall Street's expectations. Revenue hit a record $8.54 billion, up from $7.74 billion.
The earnings announcement was the first since a federal judge approved Microsoft's settlement with the Justice Department regarding accusations that the company abused its monopoly position with the Windows operating system to quash competitors. Last week, Microsoft announced a settlement of a separate class-action suit in California, saying it would provide up to $1.1 billion in vouchers to consumers.
Microsoft still faces legal action from two holdout states, private companies including Sun Microsystems Inc. and AOL Time Warner Inc., and possibly the European Commission, which has been investigating Microsoft's business practices.
Company officials said yesterday that Microsoft took a charge of $210 million last quarter for legal expenses. That's in addition to the $660 million charge for litigation costs Microsoft took last year.
Industry analysts said the dividend announcement was smart financially and politically. In this period of low interest rates, Microsoft's cash stockpile wasn't growing as quickly as it might have liked. And by distributing dividends the company gives an indirect nod to Bush's proposal at a time when some other technology companies have criticized it.
"It shows support for an administration that has shown a tremendous amount of support for them" by settling the federal antitrust case, said Rob Enderle, an analyst with the Giga Information Group.
The payout will also benefit some company executives, namely Microsoft Chairman Bill Gates and chief executive Steve Ballmer. As of Sept. 19, the date of Microsoft's last proxy filing with government regulators, Gates held 621.7 million shares and Ballmer 235.5 million shares, according to the statement. That means Gates would get dividends of $99.5 million a year -- tax-free if the Bush plan passes -- and Ballmer $37.7 million.
During the dot-com boom, few of the newly public companies that were all the rage with investors had revenue, much less profits from which dividends could be paid. But now, with the stock markets shaky, dividend-paying stocks are often seen as more stable and thus more desirable. Microsoft has always been considered a growth stock with more risk but more potential gains.
Microsoft also said it would take another step to encourage more investment: a two-for-one stock split to take effect Jan. 27. Stock splits by their nature are attempts to make shares more affordable, by lowering the bar for smaller investors.
Despite optimistic comments about Microsoft's future, company officials were less than bullish about the software and hardware sectors as a whole, disappointing investors who had been hoping for some signs that the world economy was recovering.
"We do not expect to see a significant upturn in global IT spending in the short term," Connors said.
Microsoft investors who may be worried about the wisdom of paying a dividend in such an uncertain economic and political climate need not worry too much. Microsoft has approximately 5.3 billion shares outstanding, meaning the annual cost of the dividends will be roughly $860 million, or about 9 percent of its net profits over the past four quarters.