Mi c r o s o f t S h i f t s Ge a r s a n d B e g i n s t o Un l o a d P a r t
o f I t s Va s t C a s h Ho a r d
Distributions to Shareholders:
Dividends and Share Repurchases
© NIGEL
TREBLIN/AFP/GETTY
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CHAPTER
440
Profitable companies regularly face three impor-
tant questions: (1) How much of our free cash flow
should we pass on to shareholders? (2) Should
we provide this cash to stockholders by raising
the dividend or by repurchasing stock? (3) Should
we maintain a stable, consistent payment policy;
or should we let the payments vary as conditions
change?
In this chapter, we discuss many of the issues
that affect firms’ cash distribution policies. As we
will see, mature companies with stable cash
flows and limited growth opportunities tend to
return a significant amount of their cash to
shareholders either by paying dividends or by
using the cash to repurchase common stock. By
contrast, rapidly growing companies with good
investment opportunities are prone to invest
most of their available cash in new projects
rather than paying dividends or repurchasing
stock. Microsoft, which has long been regarded
as the epitome of a growth company, illustrates
this tendency. Its sales grew from $786 million in
1989 to a projected $60.3 billion in 2008, which
translates to an annual growth rate of nearly
26%. Much of this growth came from large, long-
term investments in new products and technol-
ogy; and, given the firm’s emphasis on growth, it
paid no dividends over most of its life.
However, over time, this quintessential
growth company began to evolve into a mature
“cash cow.” Its Windows® and Office products
have saturated the market, and they help the
company produce large amounts of free cash
flow each month. Moreover, until 2003, the com-
pany did not pay any dividends to its sharehold-
ers because management wanted to keep the
cash available for acquisitions and other invest-
ments. As a result, the company reported a stag-
gering $49 billion in cash on its balance sheet as
of June 30, 2003.
Since then, Microsoft has shifted gears; and it
now pays a significant portion of its cash to
shareholders. First, in 2003, it initiated a regular
quarterly dividend of 8 cents a share. That regu-
lar dividend was doubled in 2004. However, the
cash kept pouring in; and by mid-2004, Microsoft’s
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