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Will Microsoft Use Debt to Finance Its Next Share Buyback Program?

- By Shudeep Chandrasekhar

In a move that could throw a lot of support under its stock price, Microsoft (MSFT) announced a $40 billion share repurchase program. Microsoft's stock price has been moving sideways since the start of the year, with the stock showing a mere 4.11% return since the start of the year. Microsoft's revenues have been a mixed bag for the company this year as gains in cloud business and productivity products such as Office 365 has been offset by declining Windows revenues.


PC sales around the world have been declining at a rapid pace and, despite the recent stability, I strongly believe will be short-lived rather than a sign of positive change. The gap between smartphones, tablets and laptops is thinning with each passing day, so much in fact, that Microsoft is already a big proponent of the Continuum philosophy, which technically means a blurring of the difference between adjacent elements and in technological parlance indicating a seamless transitional experience between devices.

Microsoft knows that PC sales will never get back to their glory days, and it needs to buy time until revenue decline from Windows are offset by its growing cloud and software as a service revenues. That won't happen right away because Microsoft still earns in the billions from Windows.

With revenue growth that can be stable at best for the next few quarters, or possibily a year, Microsoft has made the decision to do a repeat of its $40 billion repurchase program that was announced in 2013 and expected to complete its run by the end of this year. Microsoft hasn't provided the details of how long their $40 billion dollar buyback plan will run, a smart move that will keep the market guessing.

The company also increased its dividend payout by 8.3%, which is bound to send a cheer through the ranks of dividend investors. By the end of June 2016, Microsoft had $113.24 billion in cash and short-term investments, with long-term debt of $40.78 billion. With an operating income of nearly $6.5 billion during the fourth quarter, their financial position is extremely strong, and it's not really a surprise they keep coming up with share buybacks in the order of tens of billions.

The one question that is yet to be answered is, where is this $40 billion dollars going to come from? Though their cash pile is impressive, it's a well-known secret that most of that money is sitting in overseas accounts. If brought back to the United States, the company will have a significant tax liability on its hands. They might even opt for debt to fund their share-repurchase program, considering the current interest rate environment, while continuing to earn interest from their overseas deposits.

Apple (AAPL), another company with a huge cash pile overseas and an oversized share buyback program, did the same earlier this year and Microsoft may follow suit.

"Apple has become a fixture in the bond market, relying on debt to fund a share-repurchase program that got boosted in April to $175 billion from $140 billion. Earlier this year, it sold $12 billion of bonds, only to add another $3.5 billion to the sale a month later. The company has about $71.6 billion of bond debt across several currencies, according to its latest quarterly filing." - Bloomberg

My money's on Microsoft following suit and doing what Apple did in order to lighten its tax load in the U.S.

The benefit to Microsoft is that it has effectively buttressed its stock, possibly giving it the time it needs for the full transition to take effect. The transition in question is new revenues from subscription-based software services, cloud services and devices catching up to and compensating for the decline in licensing income.

Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.

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This article first appeared on GuruFocus.


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