Microsoft's ground-breaking plan to pay more of its cash hoard to shareholders won a warm reception on Wall Street yesterday, where it was seen as more radical than most analysts and investors had expected.
The historic shift in the software firm's financial strategy would not hamper its ability to invest in growth or make big acquisitions, according to several analysts.
"They were more bold than we had anticipated on many fronts," said Mr Tom Berquist, an analyst at Smith Barney in San Francisco.
The news that Microsoft will pay out $32 billion (€26.1 billion) through a one-off special dividend later this year, while doubling its regular annual dividend, sent its shares up about 3 per cent in early New York trading.
Microsoft also said it planned to devote $30 billion to buying back shares over the next four years, implying an annual rate of $7.5 billion a year compared with the average $6.2 billion it has bought back over each of the past three years.
Wall Street's response was summed up in the headline of a research note from Mr Rick Sherlund, software analyst at Goldman Sachs: "Big, bold and something for everyone."
There were still concerns about what Microsoft executives have conceded remains a generally conservative approach to retaining cash. With the company's cash reserves expected to reach nearly $60 billion when it announces its latest earnings today, Microsoft will still keep far more cash on hand than most big companies, even before an extra $15 billion in long-term investments.
The timing of the $32 billion windfall meant investors would not face higher taxes that a Kerry administration might impose, said Mr Berquist.
While not specifically targeting the tax on dividends, the Democratic presidential candidate has said he would reverse Bush tax cuts favouring the rich. Dividend taxes were reduced last year to 15 per cent for most people from 35 per cent.
Microsoft said it planned to pay the dividend at the beginning of December, pending shareholder approval in November.
In theory, plans to distribute more of the company's cash should have no overall effect on share price, according to Microsoft executives. That would suggest that, after paying the $3 a share special dividend, its share price should fall by a similar amount to take account of its lower cash holdings.
However, since investors tend to value the stock based on the strength of its earnings, rather than its underlying assets, shareholders may see an overall gain, according to Mr Sherlund.
Paying out the cash will reduce Microsoft's interest income, and so dent earnings per share, but this should be largely offset by the planned stock buy-backs and cost-cutting, he added.
Microsoft could still mount big acquisitions, such as the takeover of German software giant SAP that it contemplated earlier this year, by simply suspending its share buy-back plan, said Mr Berquist. Investors are also looking forward to the company's annual meeting with financial analysts next week, where Microsoft has promised to spell out its strategy for future growth.
"With what to do with the cash no longer an issue, the attention now shifts to how strong Microsoft's business is," said Mr Tom Berquist of Smith Barney Citigroup. "We have been in the middle of a PC upgrade cycle this year and Microsoft's results reflect this."
Goldman Sachs's Mr Sherland said: "\ chief executive Steve Ballmer emphasized on Tuesday... that the company still has significant growth opportunities ahead of it and that \ announcements should not be viewed as an admission of diminished growth prospects."
