Seeking Alpha
Long only, value, growth, large-cap
Profile| Send Message|
( followers)  

Coming into today's Microsoft (NASDAQ:MSFT) analyst / investment community meeting, the options market was supposedly pricing in a $0.03 dividend increase, so a $0.05 hike is better than anticipated, and the share repurchase program is the same size as the last program.

Frankly, I don't think that this news is any big deal, with the primary constraint for MSFT being the percentage of cash custodied overseas. I've heard anywhere from 70% - 90% of the $77 billion in cash on the balance sheet as of 6/30/13 was held overseas and thus subject to a repatriation tax if brought back to the U.S.

MSFT Free-cash-flow and dividend / share repo summary
2013201220112010

2009

a.) cash-flow$28.9$31.6$26.9$24.1$19.0
b.) capex$4.3$2.3$2.36$1.97$3.1
c.) free-cash-flow (FCF)$24.6$29.3$24.5$22.13$15.9
d.) Dividends$7.5$6.4$5.2$4.6$4.5
e.) share repurchases$5.4$5.0$11.6$11.3$9.3

% of FCF returned to s/holders

(d + e) / c

52%39%69%72%62%

* Capex does not include $12 billion acquisition in 2010.

* Source: MSFT annual report(s) and 2013 10-K

The point of this exercise was to show readers how much excess cash was being generated by MSFT and more importantly as the last line indicates, the % of free-cash-flow being returned to shareholders annually and the TREND in that return of capital.

Let's say that (conservatively) MSFT generates $20 billion in free-cash-flow the next 5 years, or $100 billion. (And again that is below the above 5-year average of $23 billion. Let's also presume with 70% - 90% overseas, (we'll use 80%), that the $20 billion generated within the US ($100 billion generated less 80% held overseas) is $20 billion.

A $20 billion debt issue today issued with MSFT's AAA credit rating would cost a small premium to the current 5-year Treasury yielding 1.61%. A $20 billion accelerated share repurchase (ASR) of MSFT stock at $33 per share would net MSFT approximately 600 million shares of the 8.4 billion outstanding as of June 30, 2013 or an immediate reduction in shares outstanding of 7%.

That is an automatic boost to shareholders of 7% for a company that is expected to see an 8% decline in EPS (earnings per share) in fiscal 2014 ended June 30. Today's dividend and share repurchase announcement is pretty weak, but the overseas cash is really tying management's hands. Today's announcement is better than nothing.

Maybe they use Nokia (NYSE:NOK) as a wholly-owned foreign sub and use the overseas cash to retire shares as Johnson & Johnson (NYSE:JNJ) did with Janssen in June, 2012. Also, maybe ValueAct can help MSFT figure out a way to get this cash back to shareholders.

We are still long the stock since MSFT remains technically intact.

Source: Microsoft Dividend And Share Repurchase - Not That Big Of A Deal