On September 18th, Microsoft (MSFT) announced that it would increase its quarterly per share dividend payout from $.20 to $.23. This represents a 2.96% yield based on the September 18th closing price of $31.20 and represents the ninth time in the last 10 years that Microsoft boosted its adjusted quarterly dividend. We were disappointed that the dividend only increased by 15% because Microsoft generated over $19.2B in free cash flows, even though it spent $10.1B for acquisitions. While we are acquainted with how a significant portion of Microsoft’s liquidity holdings is held in tax-haven foreign subsidiaries and how a significant portion of Microsoft’s operating income is also attributed to those subsidiaries, we think that Microsoft could have easily boosted its dividend by at least 30% since it still has $12B in domestic cash and generates over $10B in domestic free cash flow. If Microsoft had paid 100% of domestic free cash flow as an annual dividend, it would have resulted in the dividend being boosted by 50% from $.80 over the previous twelve months to $1.20 for the next 12 months.

We concede that Microsoft’s stakeholders are content to see that cash stash accumulate in foreign subsidiaries because it would otherwise be taxes at up to 35% federal corporate tax rates if it was repatriated. Even when the US declared a 1 year tax holiday as part of the American Jobs Creation Act of 2004 for repatriating foreign subsidiary earnings at a rate of 5.25% instead of the 35% statutory federal tax rate back in 2005, Microsoft only repatriated $780M in foreign source income even though it had $48.7B in total liquidity balances as of that year. The Tax Holiday provision was only applicable if the company had a plan to reinvest those earnings in the US and that is why Microsoft only repatriated $780M in FY 2005.

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