Microsoft Disperses Dividends, Nov 04 | What Dividends Say About a Corporation


Every time I turn on my computer and that tiresome arpeggio comes on, I think of a trick my father once pulled on me.

One time when I was small, we were out driving around. We passed some cattle pens, and I smelled something horrible. “What’s that awful stink?” I asked. He replied with a wink, “Money!”

When Microsoft announced in July that it plans to distribute $75 billion in dividends to shareholders over the next four years, that statement said volumes about its financial condition, the technology sector, and the evolutionary processes that go on in business.

Make no mistake: Mr. Softee’s chair, Bill Gates, is not doing this to take advantage of recent laws about reduced tax cuts on dividends. He and his wife have pledged to donate their share of that pie to their Bill and Melinda Gates Foundation for charitable purposes. So, let’s look at this development in another way, using Microsoft as an example.

According to Standard & Poor’s, that dividend makes Microsoft rank 10th among the S&P 500 index’s list of the largest dividend payers. This is a huge stride for a company that is less than 30 years old. The nine corporations above it can trace their lineage back to the 1920s and earlier.
This development also points out where Microsoft is on the S-curve. Academicians use the S-curve to explain the evolution of a business or its sector of the economy. An academician would say, “The S-curve measures percent of adaptation by potential markets over time.”

I can detect your eyes glazing over; so let me explain the three sections of the curve:

1. The lower part of the S describes the innovation phase, the position of new products and businesses struggling to find ways to increase potential markets and lower production costs.

2. The next higher part of the curve represents the growth boom. As new businesses move from niches to mainstream, they produce high growth and high margins for the strongest producers. Companies plow profits back into the business to finance growth as competitors fight for market share.

3. The final section of the curve represents mature companies and industries. As products and markets mature, the large surviving competitors bring processing costs down, consolidate industries, and force out less efficient competitors. You can see this clearly in the auto industry.

The products move into mass markets dominated by a few firms. Here, pricing power and the lowering cost of production determine profits. Since, by law, corporations cannot accumulate excess profits beyond those amounts reasonably required for business operations, they distribute the cash out as dividends. Voila! Here’s Mr. Softee on the S-curve.

Moreover, Microsoft’s decision to pay dividends sends the following signals:

A. It does not foresee the need to use the cash for new acquisitions or development of new, emerging markets or applications.

B. Microsoft wants shareholders to see that their shares have value that extend to more than just corporate growth, and it wants them to develop feelings of loyalty. Shareholders will be more patient waiting for the stock’s price to rise if they receive a dividend from time to time.

C. Giving shareholders a choice as to how to use the cash deals in part with a host of governance issues plaguing corporate America, including executive pay and bonuses, corporate perks, etc.

Moreover, to pay dividends, a corporation must generate real, not paper, profits a la Enron, Tyco, Worldcom, ad nauseum. Giving the cash to shareholders effectively minimizes accounting and improper use issues by corporate insiders.

Given Microsoft’s mercurial rise from infant to mature company, we now have an answer to the question that adults used to ask my peers in our hippie days back in the 1960s: “What do you intend to be when you grow up.”

I have been using Microsoft as an example. In complying with federal regulations, I must admit that I have owned its stock for several years. However, if you want to invest in stock in Microsoft or any other similar company in the technology sector, don’t take my word for it, check it out on the Internet and ask for an annual report. As ever, I remain your friendly neighborhood financial advisor.