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Microsoft's Largesse May Benefit These Funds

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July 21, 2004 — The decision of tech bellwether Microsoft Corp (MSFT) to pay a special dividend, double its quarterly dividend, and repurchase some of its stock, should make its stockholders very happy. Mutual funds with high stakes in the company will also benefit from this enormous shower of cash.

Microsoft said it would boost its current annual dividend of $0.16 per share to a quarterly dividend of $0.08 per share, buy back up to $30 billion in stock over the next four years, and pay a one-time special dividend of $3 per share. These measures could result in an enormous payout of up to $75 billion over the next four years, resulting in the largest cash issuance in corporate history.

Romeo Dator, portfolio manager of the U.S. Global Investors Fds:All American Equity (GBTFX), was not surprised by Microsoft’s payout decision. “They had been talking about a dividend for a while now,” he said. “With the level of cash they are carrying, something like $56 billion, there was no reason to keep holding onto it, given that they are no longer a ‘growth’ story.”

Howard Silverblatt, equity market analyst at Standard & Poor’s, noted that “Microsoft’s increased and special dividend will not go unnoticed by other companies looking at large cash reserves. Cash and short-term investments have been mounting up in recent years, and the S&P Industrials cash on hand now stands at $555 billion, compared to under $500 billion at year-end 2003, and $260 billion at year-end 1999.”

Microsoft represents about 2% of Dator’s fund’s assets, but he has no plans to add to his exposure now. “The stock has been trading in a range of between $24 and $30 for the past year,” he noted. “When your revenues are so enormous, it’s hard to keep growing. I don’t expect this dividend payout to have much positive impact on the stock price now.”

Dator added that Microsoft might become more attractive to fund managers who are required to hold dividend-paying, high-yielding stocks in their portfolios. The quarterly dividend will be payable on September 14 to shareholders of record on August 25. The special dividend will be payable on December 2 to holders of record on November 17.

Silverblatt believes Microsoft’s generous payout will compel other companies to follow suit . “We believe that dividend increases, which have skyrocketed in the past 18 months, will continue, with more companies initiating and increasing their rates,” he said. “Further aided by last year’s tax changes, investors will see more dividend income from their dividend paying investments.”

Fund Advisor screened for mutual funds with a significant portion of their assets invested in Microsoft. The following portfolios had at least a 5% stake in the company as of April 30, 2004. Several exchange-traded funds also made the list, most notably iShares DJ US Tech Sect Index Tr (IYW), with a 14.2% stake, and S&P Sel Technology SPDR Fund (XLK), with 13.4% of its assets in Microsoft.


Percentage of Assets Invested In Microsoft (as of 4/30/04)

Pioneer Papp Strategic Growth Fund/A (PAAFX)


Smith Barney Technology Fund/A (SBTAX)


Pioneer Papp Stock Fund/A (LRPSX)


AAL Technology Stock Fund/A (AATSX)


Noah Fund Large-Cap Growth Portfolio (NOAHX)


American Performance Fds:Growth Equity (APGEX)


Security:Social Awareness Fund/A (SWAAX)


Quaker Core Equity Fund/A (QUCEX)


AllianceBernstein Technology/B (ATEBX)


Lake Forest Core Equity Fund (LFCEX)


Sentinel:Growth Index Fund/C (SGICX)


Golden Oak Growth Port/Inst (GDGAX)


Sentinel:Growth Index Fund/B (SBGRX)


Pioneer Growth Shares/B (PBMGX)


ING Goldman Sachs Cap Growth Port/Adv (IGSAX)


Phoenix-Engemann Capital Growth Fund/B (PGTBX)


ABN AMRO Equity Plus Fund/I (IOEPX)


J Hancock US Global Leaders Growth/C (USLCX)


Source: Standard & Poor’s.

Contact Robert F. Keane with questions or comments at: [email protected].


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