Microsoft on Monday announced that it would assume debt for the first time in its history and buy back $40 billion of its own stock. The company also announced that it would raise its quarterly dividend. The moves come amid a period of financial chaos, but Microsoft hopes it can provide its investors with some value a decade after its stock price began stagnating.
"These announcements illustrate our confidence in the long-term growth of the company and our commitment to returning capital to our shareholders," said Microsoft CFO Chris Liddell. Of course, what they really represent is the maturation of Microsoft as a business entity. The company, once known for dizzying share growth every year, has become much more staid and conservative from an investment perspective in recent years and its share price has remained flat. The buy-back tells investors that the company is fiscally solid, an important message to send during the current financial crisis.
Stock buy-backs reduce the number of shares available to the public, raising the value of those shares still remaining and, hopefully, improving the financial attractiveness of the company. However, repurchasing stock reduces the amount of money a company can spend on R&D, new products, marketing, and other revenue-increasing activities. For this reason, newer, faster-growing companies rarely buy-back stock.
Microsoft says it could assume debt of up to $6 billion "from time to time" as a result of its stock buy-back. Unlike some companies, however, Microsoft has the highest corporate credit ratings possible, so it can still borrow money at very advantageous terms. The company has almost $24 billion in cash and short-term investment assets on hand.
Microsoft isn't the only high-tech firm pursuing the stock buy-back option. Hewlett-Packard (HP) announced an $8 billion buy-back on Monday as well. (HP had previously repurchased $3 billion of its own shares in November 2007.) IBM and Oracle have recently taken on debt to fund stock buy-backs as well.
