Wall Street debates whether a rumored special dividend is the best use of Microsoft's cash.
Microsoft's stock has lagged this year's explosive tech rally due to concerns about slowing growth in the personal computer market and the threat that free operating system Linux poses to the dominance of Microsoft's Windows. Shares are up just 6.7 percent year-to-date while the Nasdaq has surged 28.3 percent.
Analysts expect earnings for Microsoft's latest fiscal year (which ended in June) to increase 13 percent, but that growth will slow to just 3 percent in fiscal 2004.
That's a far cry from Microsoft's average annual earnings gain of 17 percent over the past five years.
Microsoft already pays a dividend, albeit a small one. The world's largest software company began paying a common dividend of 8 cents a share annually in March, for a yield of only 0.3 percent. A $10 billion pay out would amount to nearly 94 cents a share, or a yield of 3.4 percent.
When Microsoft first announced in January that it would pay a dividend, CFO John Connors referred to it as a "starter dividend." Based on Microsoft's 10.7 billion shares outstanding, the current dividend plan would cost the company only $856 million a year.
After all, most technology companies have avoided dividends, preferring instead to reinvest their cash into research and development, share buybacks or acquisitions.
"When growth stocks start paying a dividend it is an indication that there are not a lot of opportunities remaining out there," said Stephen Mergler, vice president of Northstar Capital Management, which runs the Fremont Large Cap Growth fund and owns shares of Microsoft.
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