Microsoft Notebook: Bigger dividends? Not likely for a while

The sum of $53 billion is enough to fund NASA for a year, assemble a fleet of 100 Boeing 747s, and buy every person in Seattle a 2004 Subaru Outback -- with a few billion left over for incidentals.

But is that much cash in the bank enough to persuade Microsoft Corp. to increase its annual dividend to shareholders?

Many of them hope so. Yet the answer isn't as simple as it may seem, despite the events of recent weeks.

Microsoft executives have said they want to resolve major legal uncertainties before making any big move to reduce the company's cash balance. The recent settlements with Sun Microsystems Inc. and InterTrust Technologies, combined with the release of the European Commission's antitrust ruling, represent a huge step in that direction.

But even with those developments, there continues to be uncertainty on the legal front, including unresolved patent litigation and unanswered questions about the effect of the European Commission ruling.

As a result, some financial analysts aren't expecting Microsoft to announce a dividend increase when it releases its quarterly earnings this week.

The company last year sought to appease investors with its first-ever annual dividend, 8 cents a share, later doubling it to 16 cents a share for the current fiscal year.

But its balance of cash and short-term investments has continued to rise, coming in at $52.78 billion in January, when the company last reported its quarterly financial results.

"If you think about their cash position, it is nothing short of a small bank. Actually, it's probably a medium-sized bank," said Gene Munster, senior software research analyst with the Piper Jaffray securities firm in Minneapolis, Minn. At some point, he said, "they've got to do something with it."

The issue has taken on heightened significance as the company has matured and begun to attract more value-oriented investors, who are often more interested in dividends, Munster said. Dividends aren't as important to typical technology investors, who would rather see rapid growth.

The company's cash is a frequent subject of articles in financial magazines and newspapers. Perhaps the most brazen was a cover story in Barron's magazine last year, showing a caricature of Microsoft Chairman Bill Gates, grinning and clutching an overflowing bag of money. "Hey, Bill, share the wealth," read the headline.

Analysts often ask about the cash in conference calls and meetings with John Connors, Microsoft's chief financial officer. The subject is almost sure to come up again Thursday, when Microsoft releases its financial results for the quarter ended March 31. (Analysts surveyed by Thomson First Call expect the company to post earnings of 29 cents a share on revenue of $8.66 billion.)

A big increase in the annual dividend isn't the only way the company could reduce its cash balance. Other options would include a stock buyback, or a special, one-time payout to investors.

Remaining legal uncertainties that may prevent such a step include an appeal pending by Massachusetts in the United States antitrust case. If that appeal is successful, the behavioral remedies could go beyond those imposed on the company through its settlement with the U.S. Justice Department.

Microsoft is also involved in a series of patent disputes, and it faces further antitrust litigation, including a lawsuit filed last year by Seattle-based RealNetworks Inc.

In addition, the company has said it plans to appeal the European Commission's March antitrust ruling. It's not yet clear whether the behavioral remedies and $600 million fine that have been imposed against the company in that case will take effect pending the appeal.

Microsoft's Connors, during a January presentation to financial analysts in Boston, cited the Sun and European Commission cases as two of the major hurdles to be cleared before the company would feel comfortable reducing its cash holdings.

"The big reason for wanting those out of the way isn't oriented around a potential fine, it's oriented around what could the negative impact be from a business model, or a product distribution change," Connors said.

But the company clearly recognizes that shareholders are getting restless.

The next month, at a Goldman Sachs investment forum, analyst Rick Sherlund noted that the then-pending Sun Microsystems suit wasn't expected to reach trial until 2006 or 2007. He asked Connors if Microsoft would make some kind decision about its cash before then.

"Either that," Connors quipped, "or not come to these sessions anymore."

Microsoft Notebook is a Monday feature by P-I reporter Todd Bishop. He can be reached at 206-448-8221 or toddbishop@seattlepi.com

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