Microsoft: How About a Leveraged Buyback?

So here’s an idea on what Microsoft (MSFT) ought to do about its languishing stock price: lever up and do a giant share repurchase.

The proposal comes courtesy of Friedman Billings Ramsey analyst David Hilal. In a research note this morning, he says that with the company’s current repurchase authorization nearly completed, a new buyback plan is coming. And he contends that “creative financial engineering in the form of a leveraged share buyback would be a clever move.”

Hilal notes that the stock is cheap, trading at just 11x calendar ‘09 estimates; he also notes that it has predictable cash flows and is highly credit worthy. The company has $23 billion in cash, a total that is growing about $5 billion a quarter.

By his calculation, a levered buyback could be significantly accretive to earnings. A debt-funded buyback of $20 billion would boost CY ‘09 earnings by 7 cents a share, he figures. A $35 billion plan could lift profits 13 cents; a $50 billion plan, 20 cents. The company has a market cap of about $237 billion; a $50 billion buyback would cut the share count by about 20%.

“With everything else constant, such a buyback would theoretically support a higher valuation because of its accretive nature,” he writes. “On top of that, given the acceleration of earnings growth and improvement in ROE, one could argue for an expansion of MSFT’s P/E multiple. A levered buyback also lowers MSFT’s [weighted average cost of capital], which in turn should lead to a higher equity valuation.”

Hilal maintains an Outperform rating on the stock, with a $40 price target.

MSFT today is down 13 cents, or 0.5%, to $25.51.

Comments

[DonaldRay]

Good Ideal. Maybe my 29 jan calls will be in the money by January

[jwiz]

I would like to see a big increase in the dividend and a buy back.

[FootballGeek]

How about a special dividend again or an increase. That
would be a better use of our money. They have wasted
enough with the yahoo mess.
Buy backs only benefit the employees with options