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Microsoft (NASDAQ:MSFT) announced yesterday a plan to increase its shareholder dividend to 13 cents per share (up 2 cents or 18%) and to buyback up to $40 billion in stock by 2013. Given Microsoft's relatively low share price, its mountain of cash, and the tough times on Wall Street, the company is certainly doing right by investors.  But it also points to a BIG problem for the software maker: It doesn't know how to fund innovation.

Traditionally, technology companies like Microsoft and Cisco (NASDAQ:CSCO) did not pay dividends. That's what stodgy old companies like GM (NYSE:GM) and Ford (NYSE:F) did. Not red-hot, double-digit revenue growth machines. Tech firms argued that generating excess cash was a terrifically efficient way to gain the necessary capital to plow money back into R&D. And if growth could not be had by boot strapping, then the excess cash could be used to fund acquisitions (some stock would be helpful, too).

That's the logic used by Microsoft until 2003, when it began returning some of its cash to shareholders in the form of dividend.  Back then, in the dark days of the tech melt-down that made some sense. Offering a dividend suggested a certain maturity by Microsoft. For instance, Intel (NASDAQ:INTC) had begun paying dividends in 1992. Meanwhile, over at Cisco, the communications equipment did not pay begin to pay dividends -- and still does not.

Now five years later, Microsoft is going even further. It will embark on a buyback program. It's good news for shareholders, the flow of capital, and perhaps Wall Street generally.  But what does it say about the future of Microsoft? If its adolesence ended in 2003, what stage of life is it entering today?

Source: Microsoft: Can't Buy Yahoo? Let's Buyback Stock!