Dividend capture and Microsoft's (MSFT) one-time dividend of $3 per share

Microsoft announced a special $3 per share dividend, $30 billion stock repurchase, and a doubling of it's current dividend.

As time allows, I'll examine "dividend capture" opportunities for this special $3 per share special dividend.

Here is the text from Microsoft's announcement of July 20, 2004 :

Microsoft Outlines Quarterly Dividend, Four-Year Stock Buyback Plan, And Special Dividend to Shareholders

Company Is Confident About Future Growth and Innovation Opportunities, Plans to Provide Up to $75 Billion in Value to Shareholders Over Next Four Years

REDMOND, Wash. - July 20, 2004 - Microsoft Corp. today announced that its board of directors approved an $0.08 per share quarterly dividend, plans to buy back up to $30 billion of the company's stock over the next four years, and a special one-time dividend of $3 per share.

"We are confident in our long-term ability to grow revenue, profits and shareholder value through our innovation and execution. We have been successful in addressing a significant portion of our ongoing legal exposure, and all seven of our businesses are growing," said Steve Ballmer, Microsoft's chief executive officer. "We will continue to make major investments across all our businesses and maintain our position as a leading innovator in the industry, but we can now also provide up to $75 billion in total value to shareholders over the next four years."

"As we looked at our cash-management choices, our priorities were to increase our regular payments to shareholders, increase our stock-buyback efforts given our confidence in the company's growth prospects, and distribute additional resources in the form of a special one-time dividend," Ballmer added.

This payout will not affect Microsoft's commitment to research and development to fuel growth in the years ahead. "We see incredible potential for our innovation to help businesses, individuals and governments around the world accomplish their goals, and we will continue to be one of the top innovators in our industry - as evidenced by the fact that we will file for more than 3,000 patents this fiscal year," said Bill Gates, Microsoft's chairman and chief software architect.

In the past two years, Microsoft has made significant progress in resolving many of the legal issues facing the company - including the recent U.S. Court of Appeals decision reaffirming its settlement with the Department of Justice, most of the state class-action lawsuits, and the AOL and Sun Microsystems cases — along with patent claims such as the InterTrust litigation. Resolving these issues marks an important step forward in clarifying Microsoft's legal and related business risk.

"We have resolved the large majority of our legal issues, which the company has always said was a prerequisite to addressing our cash management plans," said Brad Smith, Microsoft's general counsel. "While we still have a number of legal issues and we take them seriously, we have reduced the legal uncertainties facing the company, and we have a much clearer understanding of the potential risks involved in the cases that remain, such as the ongoing European Commission case."

Under the plan approved by the Microsoft board today, the company will move from its current annual dividend of $0.16 per share to a quarterly dividend of $0.08 per share, which would essentially double the annual dividend to approximately $3.5 billion, if continued at that level. As a reflection of the company's strong financial outlook, the board also approved plans to buy back up to $30 billion in Microsoft stock over the next four years. The company will also pay a one-time special dividend of $3 per share, or $32 billion, subject to shareholder approval of stock plan amendments that will allow certain adjustments to employee equity compensation awards to offset the impact of this large one-time payout. These steps would represent a combined total value to shareholders of up to $75 billion over the next four years, if quarterly dividends continue at the new level.

The quarterly dividend will be payable on Sept. 14, 2004, to shareholders of record on Aug. 25, 2004. The special dividend will be payable on Dec. 2, 2004, to shareholders of record on Nov. 17, 2004, conditioned upon shareholder approval of amendments to the employee stock plans at the annual shareholders meeting currently planned for Nov. 9, 2004.

Because the company's employee stock plans did not contemplate a one-time special dividend , the board has approved adjustments, subject to shareholder approval, that will protect employees as the share price declines due to the one-time special dividend. Mathematically, after a company makes a large one-time distribution, the overall value of the company declines by the amount of the distribution, which in turn reduces the stock price by a similar amount. If amendments to Microsoft stock plans authorizing the adjustments are not approved by shareholders this fall, the special dividend would not be made, and the board and management would consider other alternatives.

"The innovations our employees have created over the years have made our company successful, and our stock compensation programs have been a critical part of our ability to create this shareholder value," Ballmer said. "Adjusting the stock options and unvested stock awards held by our employees to offset the impact of the special dividend is a fair and logical step to ensure that our employees are not inadvertently disadvantaged by it. Our request that our shareholders approve the plan changes reflects our commitment to open interaction with our shareholders and good corporate governance."

The stock buyback program approved by the board authorizes the company to buy back up to $30 billion over the next four years. The specific timing and amount of repurchases will vary based on market conditions, securities law limitations and other factors. The repurchases will be made using Microsoft's cash resources, and the program may be suspended or discontinued at any time without prior notice.

According to the company's most recent quarterly report on Form 10-Q, Microsoft had $56 billion in cash and short-term investments as of March 31, 2004. The company generated $15.8 billion in cash flow from operations on revenues of $32.19 billion in fiscal year 2003, the most recent year for which financial results have been reported.

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