Seattle — Redmond, Washington based computer software heavyweight Microsoft Corp., attempting to revitalize its share price after a 29 percent slump this year, on Monday announced a new stock buyback program of its own shares up to $40 billion, while raising its dividend and issue its first commercial paper.
The announcement came at a time when most U.S. companies are slowing the rate of share repurchases to hoard cash over liquidity concerns, sending its stock up more than 5 percent in premarket trading.
Microsoft, whose share price has dropped nearly 30 percent this year, said in a statement that it would repurchase up to $40 billion worth of its shares through September 2013 and that it had completed its previous 40-billion-dollar stock repurchase program.
Investors, who were apparently cheerful at the news of stock buyback programs because it makes existing shares in the market more valuable, pushed Microsoft’s stock to $26.50 a share in premarket trading, up 5.33 percent.
Lately, Microsoft has witnessed a sharp decline in its share prices losing around 22 percent of their value since it announced its unsolicited bid for Yahoo earlier this year, which ultimately failed to take hold. And the beating that the broader markets have been taken in the interim also has not helped Microsoft’s share price.
The Redmond, Washington-based company, meanwhile, said its board of directors had also declared a quarterly dividend of 13 cents a share, which is an 18 percent increase over its previous quarterly dividend. The dividend will be payable on December 11 to shareholders of record as of November 20.
“These announcements illustrate our confidence in the long-term growth of the company and our commitment to returning capital to our shareholders,” said Chris Liddell, chief financial officer of Microsoft.
Furthermore to the stock buyback program and increased quarterly dividend, the world’s biggest software maker also added a $2 billion commercial paper program and is also planning to float out corporate debt of up to $6 billion. The proceeds from the debt offerings will be used for general corporate purposes, stock repurchases, and working capital.
“They have been seeing some pressure from investors to use more of their cash for buybacks,” said Donovan Gow, an analyst at Greenwich, Connecticut-based American Technology Research. “They are not seeing a lot of really attractive acquisitions, particularly following the Yahoo debacle, so the view is this is the best thing to do with their huge cash balances.”
Standard and Poor’s Ratings Services and Moody’s Investors Service meanwhile gave their highest possible corporate credit rating to Microsoft, the first company to get the AAA rank in a decade and that the outlook was stable for the software giant.
“The ratings on Microsoft reflect the company’s excellent operating performance and financial profile,” said Standard and Poor’s credit analyst Philip Schrank.
Microsoft has repaid more than $115 billion to investors over the past five years in repurchases and dividends. The $47.5 billion Yahoo bid, and concern that Chief Executive Officer Steve Ballmer did not have a strong enough Plan B when the effort fell through, drove down the stock this year. Analysts such as Heather Bellini have predicted up to $20 billion in new buybacks.
Meanwhile, PC maker Hewlett-Packard and Nike have also announced a major stock buy-back programs Monday, authorizing up to $8 billion in shares to be repurchased.
The personal computer-maker will buy back $8bn of shares, while Nike’s plan is worth $5bn.
Howard Silverblatt, a higher-ranking analyst at Standard & Poor’s, said many cash-rich companies are holding tightly to their cash during the financial market turbulence with buybacks falling below $100 billion in the second quarter, the lowest levels since the third quarter of 2005.
“They are choosing not to spend a lot on share buybacks,” said Silverblatt, noting that many companies are now only buying back shares to offset share dilution, not to drive down the share count to raise earnings per share.
“The openness to debt was the most surprising announcement of this morning’s and is an encouraging signal of management’s increasing openness to developing a more efficient capital structure,” wrote Charles Di Bona, a research analyst at Sanford C. Bernstein, in a note to clients.
The BBC’s technology reporter Maggie Shiels said there was little doubt Microsoft had to do something because it simply had too much cash lying on its books following the company’s failed attempt to buy either all or part of Yahoo.
Liddell, who joined in 2005 from International Paper Co., has pressed to broaden the capital structure to include debt. He told analysts the stock price was “incredibly frustrating” at a meeting in July and said a buyback “makes more sense than it ever has.”
“Chris Liddell is doing everything correct,” UBS’s Bellini, the top software analyst in an Institutional Investor survey, quoted as saying in an interview to Bloomberg TV. The New York-based analyst recommends buying Microsoft shares. “It is great he persuaded Steve to see the picture of debt as not being a negative one.”
Frank Shaw, a spokesman for Microsoft, declined to comment.