Microsoft (NASDAQ:MSFT) has announced that it’s going to sell debt this year in order to buy back its stock and pay dividends. This is a fascinating move and it shows just how unusual the current market is.
Whatever you think of Microsoft and its future, the company currently generates an astounding amount of cash. According to the latest statement, MSFT has a cash balance of over $36 billion which works out to $4.22 per share. Their long-term debt is roughly $6 billion. Shareholders, not surprisingly, want some of that loot.
The problem with Microsoft’s huge bank account is that it’s mostly held overseas. As a result, MSFT is going to try and raise as much money as possible without affecting its AAA rating. One source said they could probably take in $6 billion.
When debt is expensive and equity is cheap, the rational choice for companies is to do exactly what Microsoft is doing—issue debt to buy stock. I’d be very curious as to the interest rate MSFT would land.
The company currently pays a 13-cent quarterly dividend which comes out to an annual yield of 2.07%. The dividend, however, is fairly modest compared to Wall Street’s current earnings estimate of $2.36 per share.
In May 2009, MSFT went to the bond market and floated $2 billion at 2.95% for 5-year notes, $1 billion at 4.2% for 10-year notes and $750 million at 5.2% for 30-year bonds. I think they can easily get much lower than that today.
Microsoft is in the lucky position of having its debt rated AAA by Moody’s and S&P. That saves them a lot of money is borrowing costs. Last year, the software had an amazing $22 billion in free cash flow. About half of that came from the United States.
Of course, there’s the question
