Dividend Policy

CHAPTER five: Case Studies

In addition to the regression analysis of companies listed in the NYSE, I also did case studies on certain companies who I thought had interesting dividend behaviour. This chapter consists of 4 case studies of companies belonging to a variety of stock exchanges like NASDAQ, London stock exchange and Bombay Stock Exchange.

In the case studies, I give a brief introduction about the company's operations and then talk about their dividend history and recent payout behaviour. I also have tried and given some suggestions that I think might improve the firm's value.

5.1 Microsoft Corporation (MSFT)

Microsoft the world's leading software companies and provides a variety of products and software's, most popularly, Windows operating system. Due to its core markets maturing, it has recently been aiming at the services sector and has moved into other markets like video game consoles, enterprise software's, software development tools and internet access services. Known as one of the most profitable companies in the software industry, Microsoft has had its share of litigations in the recent years. It was charged with antitrust violations by the US government in 1998, which was settled by a tentative settlement between the company and the US Justice Department, whereby Microsoft agreed to uniformly license its Windows operating systems, not to offer exclusive contracts to manufacturers, and to allow competing software to be included with its operating systems. Microsoft has also had problems with other companies like long time rivals Netscape, and Sun. All these cases haven't had much effect on Microsoft's profitability as its cash balance crossed $50 billion by early 2004.

Despite a high level of profit, Microsoft's investors had a persistent complaint against its zero dividend policy as it had not paid any cash dividend for the first 28 years of its operations. It followed a policy of investing all the earned money in its R&D. However, 2003 saw a turning point in Microsoft's financial history as it announced its first ever cash dividends for its common stock. At that time, it was the only company in the DOW30 which had not paid cash dividends for so long. Cash dividends of $0.08 per share were announced on January 2003. Even though this was a small percentage of Microsoft's overall profits, it was considered a good decision by some analysts, for instance, Ralph Nader, said that

"It's a good small step, and it will put substantial pressure on Silicon Valley companies

like Cisco and Oracle to do the same,"

Different analysts gave out various reasons to Microsoft's decision to start paying dividends. It was believed the proposal by the Bush administration that ended the "Double Taxation on dividends" was one of the reasons. However Microsoft denied them and said that the decision to pay dividends was due to the resolution of long pending legal issues and companies strong financial performance. The company also introduced a direct stock purchase program and a dividend reinvestment program, which gave both new investors and current stockholders the option of receiving annual dividend in cash or having it automatically reinvested. Microsoft announced a doubling of its dividends from 0.08 to 0.16 cents per share on 12th September, 2004 as its cash reserves approached $50 billion.

Another major instance for Microsoft was in 2004. After its first cash dividends Many analysts had predicted that Microsoft would give out a higher dividend, do a stock buyback or make a one-time payout. However, Microsoft did all three when it announced that it was making a one-time "special" dividend payment of $32 billion, along with plans for a massive buyback of up to $30 billion of its stock over the next four years. Microsoft also said it would double the dividend it paid out annually from 16 cents to 32 cents a share. As an aftermath to this announcement, many analysts believed that Microsoft was trying to signal its evolution from a "hot stock to mature corporation". A report by the Wall street Journal dated July 21st, 2004 stated that

"Microsoft has been successively transforming relationships with competitors, customers and its employees. Over the past year, it has mended fences with some of its staunchest rivals including Sun Microsystems Inc., resolved most of the long-running antitrust suits against it, instituted new policies for taking in customer feedback and killed its stock options in favour of another stock-based compensation preferred by slower growth companies."

This change in dividend behaviour made people think that Microsoft's had shifted its focus towards the shareholders and was trying to broaden its shareholders base from only "growth" investors to investors who prefer low risk and regular dividend payment. As a single largest shareholder of the company at the time, Bill Gates received about $3.6 billion from the one-time dividend and $384 million from the stock's annual payout. However, he donated his share of one-time dividends to the Bill & Melinda Gates Foundation.

This huge announcement also had major effects