It's very interesting that Microsoft is the first large tech company to do this in the current cycle. So many of their peers are also wallowing in cash and seemingly unwilling to make large investments so the pile keeps growing.
Companies are supposed to use their capital to innovate and create new, market-changing products and services. Perhaps it's because interest rates are so low and therefore capital is so cheap? Is the hording related to an expectation of another round of the regular tax amnesty for them to repatriate the funds to the US?
In the last quarter, Google reported $54.4B in cash and short term investments and $14.1B in revenue, Apple reported $42.6B in cash and equivalents and $35.3B in revenue and Microsoft reported $76.7B in cash & equivalents and $19.8B in revenue.
Measured in terms of quarters of revenue held in cash & equivalents, Google and Microsoft are more or less tied at 3.8 quarters, and Apple is running relatively lean at 1.2 quarters.
Despite not paying dividends Google is, proportionate to revenue, not holding any more cash than Microsoft, and Apple is holding far less.
Why is 'revenue' the proper denominator, and not 'earnings' ?
Sure, if revenue hypothetically vanished, cash could cover it, but a lot of revenue is tied to expenses ("cost of goods sold" in the retail world), so if revenue dropped, expenses would as well.
You should be using profit not revenue (also, not all quarters are the same, using merely the most recent one is a bad practice). Measured in terms of years of profit being hoarded google is at 5 years, Apple is at 1 year, and Microsoft is at 3.5 years. No matter how you slice it that's a crap ton of money.
I agree with the GAAP rules, but the GAAP rules require < 90 day instruments. The complexity of rolling $140B every 90 days is insane. You are going to have days where there just isn't enough liquidity.
They are basically managing $100B in house rather than getting screwed by banks every 90 days. GAAP is right, Apple is also right, but saying they only have $40B in cash, is very misleading. They could return $100B to shareholders in 6 months with ease.
Do note that Microsoft has an ongoing $40 billion share repurchase program that's ending in two weeks.
So they're just renewing the buybacks with another $40 billion. It would actually have been a bigger deal if Microsoft had allowed the program to expire without a replacement.
From Microsoft's annual report for fiscal year 2013:
> "On September 22, 2008, we announced that our Board of Directors approved a new share repurchase program authorizing up to $40.0 billion in share repurchases with an expiration date of September 30, 2013. As of June 30, 2013, approximately $3.6 billion remained of the $40.0 billion approved repurchase amount."
And the 2008 buyback program was, in turn, a continuation of the 2004 buyback program.
The idea behind keeping capital in the company is that the company is able to generate better returns than the shareholders could.
There's no reason why this has to be market changing, etc. Building a new factory that produces the same goods with more capital and less labour could be a use that would generate greater returns.
There are many reasons to hold capital and many reasons to dividend it.
Both are ways to return money to the shareholders with the balance shifting from giving more flexibility to the shareholders vs more flexibility to the company. Of course the chunks are substantially larger when it comes to buying back individual shares vs paying out a (still relatively small) dividend so there will likely be a balance struck between the two.
By announcing a share repurchase they are also signalling they believe that the shares are undervalued but the strength of that signal is strongly dependent on the amount of money they commit to buying back stock, in this case about 1/7th of their total cap.
Subtext: We don't know where to put the $$ at this critical transition point (Ballmer leaving). Rather than figuring it out, we're just going to give the money to shareholders -- that's the safe way so that they can't question our fiduciary responsibility.
All tech companies should do this once they reach a certain maturity. Eventually every company should return capital to the markets, otherwise the markets would just be one big ponzi scheme...
I happen to agree with you re:dividends. I've been a big proponent of MSFT's dividend for years. But I'm not sure that increasing it (or share buybacks) right now is a good idea.
Microsoft is struggling to figure out their future direction in the new mobile-centric world. They've now released multiple products that are (IMO) flops. Throwing cash back to investors might be good for the short term, but its all for naught if the company is irrelevant in 10 years.
Not necessarily a good comparison, since the shares can be traded. You can step in very late and still have all the chances to get very rich, which is hardly possible with a Ponzi scheme.
A ponzi scheme is defined by the fact that the only profit to be made comes from people who buy in after you. If companies don't return capital to the markets (through dividends or buybacks), then it absolutely fits the definition of ponzi scheme.
The proper cycle of a publicly traded company is that it trades equity for capital, uses said capital to invest in itself, then returns capital when it reaches a certain maturity. Anything else is a scam.
The difference between a company and a Ponzi scheme is that the company is actually creating some value. It is converting capital into resources, priorities and processes that generate more capital than it gets. At some point it can't convert capital into more capital, so it's better to pay a dividend -- but even if it never does this, it's not a Ponzi scheme if value is being created.
A Ponzi scheme never generates more cash than it gets -- it only simulates profits.
But shares are traded because there's an assumption that the company will distribute earnings (as dividends or buybacks) eventually. Otherwise they would have little (voting rights?) or no value.
Dividends are far from the only way you can realize value as a buy-and-hold investor with infinite patience. For example, the company might be acquired in a cash-for-stock deal. (I don't hold my Microsoft shares in the hopes that someday Google or Apple will just swallow them for old time's sake, but hey, stranger things will happen as time goes to infinity.)
This means that even if your stock of choice never distributes dividends, it is essentially a non-expiring call option on participation in an eventual sale.
Ultimately, if a company does not do that at all (in its lifetime) then it does not provide any benefit to it's shareholders except the share price gains - and for a company which starts from 0 and ends at 0, share price gains are essentially zero sum.
So what you are arguing is that a company should not provide a positive payout to its shareholders. Well, I beg to disagree.
> Ultimately, if a company does not do that at all (in its lifetime) then it does not provide any benefit to it's shareholders except the share price gains - and for a company which starts from 0 and ends at 0, share price gains are essentially zero sum.
Corporations rarely either start with a stock price of $0/share, and only end at $0/share when they end insolvent, which, while many end that, isn't the way all end.
Obviously I was oversimplifying. However, my claim still holds: if companies were not paying dividends at all, then there'd be no stockmarket and no investing.
> However, my claim still holds: if companies were not paying dividends at all, then there'd be no stockmarket and no investing.
Sure there would. The main theoretical support of the value of stock as a marketable asset is the claim on the corporations assets at dissolution and the hope that when the corporation is dissolved, your share will be worth more than when you bought it; dividends are just a means of effecting a partial dissolution.
If corporations never paid dividends, were never acquired for cash, and never otherwise dissolved except through insolvency which returned nothing to shareholders, then your argument with regard to the stock market might hold some weight (there'd still be a potential for a stock market if stock existed, but without an effective claim on assets, its hard to see how it would never suffice for raising capital in the first place.)
But there'd still be investing, even in businesses; it'd just all take the form of bonds.
I never understood the purpose of share buybacks. Sure there will be less shares outstanding but the company will be worth that much less from having spent the cash to buy the shares.
It increases demand for the shares which raise the price. It is a way of paying out the people that are most eager to leave.
For example, say you and I both owned a company together, each of us with one share. If the company had 100 bucks in the bank and an app that earned 1 dollar a month, the company could offer 60 dollars for a share. This gives us a point of discrimination where I might take the deal since I feel like I could put it to better use elsewhere.
Furthermore in some places capital gains are more attractive than dividends (I know, it is stupid. It has to do with the original purchase price and changing tax rates over the years). So what some companies do is both a dividend and a share buy back for different classes of shares both of which are convertible to a "true" share. That way you can determine which method you want to get you money out of the stock.
It transfers money from the company to the owners, just like dividends do. Other than possibly providing different tax outcomes, share buybacks and dividend payments are completely equivalent. Any shareholder can take their portion of the dividend/buyback as either as ownership of the company, or as cash, by trading the relevant amount on the market.
This is actually not true because it ignores the fact that a company's shares could be trading cheap or dear. One dollar in the form of a dividend payment is always worth one dollar (ignoring taxes), whereas if the company can buy in a share with intrinsic value of X for the cost of 0.8*X, then it is "creating value" for the remaining shares. Conversely, if the shares are expensive relative to intrinsic value, then a buyback destroys value for the remaining shares.
I wonder what this means in terms of Microsoft's overall corporate direction... however, the scale isn't large enough to indicate that they intend to stop deploying cash to expand into new markets. (e.g., instead of throwing billions to promote bing, they just return the money to shareholders).
Still, it's a noteworthy change that might mark the beginning of a change towards the post-Ballmer era.
Microsoft has been buying back shares and increasing its dividend since 2004. This is just a continuation of the existing program.
It would have been more noteworthy if Microsoft had stopped buying back shares, or stopped paying the dividend, or even just allowed the dividend to remain unchanged.
Companies are supposed to use their capital to innovate and create new, market-changing products and services. Perhaps it's because interest rates are so low and therefore capital is so cheap? Is the hording related to an expectation of another round of the regular tax amnesty for them to repatriate the funds to the US?