At Least Microsoft Thinks MSFT Stock is Cheap

Company buying back its stock with war chest

   

Microsoft (NASDAQ: MSFT) has announced that it’s going to sell debt this year in order to buy back its stock and pay dividends. This is a fascinating move and it shows just how unusual the current market is.

Whatever you think of Microsoft and its future, the company currently generates an astounding amount of cash. According to the latest statement, MSFT has a cash balance of over $36 billion which works out to $4.22 per share. Their long-term debt is roughly $6 billion. Shareholders, not surprisingly, want some of that loot.

The problem with Microsoft’s huge bank account is that it’s mostly held overseas. As a result, MSFT is going to try and raise as much money as possible without affecting its AAA rating. One source said they could probably take in $6 billion.

When debt is expensive and equity is cheap, the rational choice for companies is to do exactly what Microsoft is doing—issue debt to buy stock. I’d be very curious as to the interest rate MSFT would land.

The company currently pays a 13-cent quarterly dividend which comes out to an annual yield of 2.07%. The dividend, however, is fairly modest compared to Wall Street’s current earnings estimate of $2.36 per share.

In May 2009, MSFT went to the bond market and floated $2 billion at 2.95% for 5-year notes, $1 billion at 4.2% for 10-year notes and $750 million at 5.2% for 30-year bonds. I think they can easily beat get much lower than that today.

Microsoft is in the lucky position of having its debt rated AAA by Moody’s and S&P. That saves them a lot of money is borrowing costs. Last year, the software had an amazing $22 billion in free cash flow. About half of that came from the United States.

Of course, there’s the question of should a company be trying to make money by shifting pieces of paper around. As David Merkel says, “Why pay money for financial engineering? Better you should look for genuine organic growth.” He’s got a good point. When I invest in a company I want them to do what they do best. Let me worry about if their stock is a good buy or not.

Since FY 2006, Microsoft has spent over $78 billion on share buybacks and the stock has done nothing but go down. The company is currently in the middle of a $40 billion buyback program that runs through 2013.

The other option is for Microsoft to spend its cash on acquisitions. Still, we’re back to the company being a money manager more than a software firm. To quote Biggie Smalls, “Mo Money, Mo Problems.”

As of this writing, Ed Elfenbein did not own a position in any of the stocks named here. Ed is editor of Crossing Wall Street, a Web site about stocks and the market designed to help individual investors. Check out his free Buy List of stock recommendations.

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Article printed from InvestorPlace Media, http://investorplace.com/2010/09/microsoft-msft-stock-cheap/.

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