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A fatter dividend coming for Microsoft shareholders?

September 13, 2010 |  3:33 pm

Microsoft Corp. shares on Monday showed just how hungry equity investors are for good news -- and how willing they are to pounce on it as economic fears recede again.

The software giant’s stock soared $1.26, or 5.3%, to close at $25.11 on a report that the company is planning to borrow in the bond market to fund a stock buyback and dividend increase.

Bloomberg News, citing an unnamed source, said Microsoft “would try to raise as much as it can without jeopardizing its debt rating.” The company has an AAA rating from Moody’s Investors Service and from Standard & Poor’s.

Why would a firm with nearly $37 billion in cash and short-term securities on its balance sheet choose to borrow? Because much of that stash is held overseas, and Microsoft would have to pay taxes on the money if it were repatriated, Bloomberg noted.

Besides, with investors so ravenous for bonds, companies with stellar credit ratings can borrow very cheaply.

Given Microsoft’s fortress-like balance sheet, some shareholders have been agitating for the company to return more cash to investors -- particularly in light of the stock’s dismal performance this year. The shares are down 17.6% year to date while the tech-dominated Nasdaq composite index is up 0.7%.

Microsoft now pays a quarterly dividend of 13 cents a share, or 52 cents annually. The payout hasn’t been raised since September 2008. At Monday’s stock close the current dividend gives the shares an annualized yield of 2.1%, which is slightly above the 2% yield of the Standard & Poor’s 500 index.

From Bloomberg:

Microsoft Chief Financial Officer Peter Klein faced shareholder questions at a Sept. 7 Citigroup Inc. conference on why the company doesn’t take on more debt to increase its share buybacks or fund a major increase in the quarterly dividend.

Asked by an attendee about raising “cheap debt financing” and using it for a buyback, Klein replied: “That is certainly one important factor in our overall strategy related to capital structure. It’s obviously a topic we’ve been thinking about a lot right now.”

One issue that could dissuade the company from increasing its dividend payout is that federal income tax rates on dividends will rise on Jan. 1 unless Congress acts to extend the tax cuts enacted in 2001 and 2003. Higher tax rates could tilt management toward a stock buyback, which in theory could help boost the share price.

After diving 9.1% in August, Microsoft’s shares are up 7% this month amid a broad market rally. The Nasdaq index is up 8.1% in September.

Wall Street’s bulls have been reenergized this month as stronger-than-expected economic data have damped fears of a “double-dip” recession. The market also is just snapping back from what had been extreme levels of investor bearishness at the end of August.

-- Tom Petruno