What Microsoft's new CEO should do

• Pay U.S. taxes and avoid misguided acquisitions
• Boost dividend and stock repurchases
• Focus on business customers

(Editor's note: Dan Ferris, an analyst at Stansberry & Associates, asserts that Microsoft's outgoing CEO Steve Ballmer has been stingy sharing free cash flow with Microsoft shareholders. Here's what Ferris would like to see Microsoft's next CEO do.)

Microsoft expects to have a new CEO by the end of the year. Let's not waste time guessing who it might or ought to be. Let's make it clear what the new CEO should do on his/her first day at work.

Microsoft isn't a consumer PC company anymore. It gets more than 60% of its sales and 70% of its profits from selling software to small, medium, and large businesses. Microsoft isn't Apple. Microsoft is a business software company – and a great one.

Context: Why some shareholders also want Bill Gates out.

It has 16 businesses that do $1 billion or more a year in sales. Some grow at double-digit rates. These and other Microsoft ventures gush tens of billions in cash flow every year. You've probably never even heard of some of these billion-dollar businesses: SQL Server, System Center, Sharepoint, Lync... These are business-software tools. Information technology professionals can't do their jobs without them.

Microsoft has its problems, but its biggest one is rarely mentioned: It doesn't know what to do with all the money it makes. That, I believe, is the real reason its stock price never seems to go anywhere.

Microsoft has wasted nearly $22 billion on three terrible acquisitions since 2007. It paid $6 billion for online marketing services firm aQuantive – and wrote the entire investment off as a total loss last year. It paid $8.5 billion for Internet phone company Skype, which adds little to Microsoft's massive bottom line. And now it's paying over $7 billion for Nokia – a dying brand whose sales plummeted another 32% in the first half of this year.

Microsoft should listen to co-founder and chairman Bill Gates' good friend Warren Buffett, who reminds us, "Most turnarounds don't." Nokia hasn't made money in three years. Microsoft won't turn it around. It's just another expensive dud.

For all its genius at software, Microsoft is lousy at reinvesting its huge profits. The solution is simple. Pay out more in dividends and share repurchases. Microsoft holds $70 billion offshore, as if paying U.S. corporate taxes is worse than Microsoft's huge, costly acquisitions. It should bring the cash home and pay it out to shareholders.

Microsoft should also dedicate 50% or more of its annual excess cash flow to dividends and share buybacks. That'll help discipline Microsoft against more waste, cause its share price to soar, and reward shareholders of the world's greatest software firm, accordingly.

About the author: Dan Ferris is a value analyst for Stansberry & Associates Investment Research and is the editor of two monthly investment research publications, The 12% Letter, an income-focused research advisory which looks for the market's best dividend-growth stocks and Extreme Value which focuses on the safest stocks in the market: great businesses trading at steep discounts. Dan's strategy of finding safe, cheap, and profitable stocks has earned him a loyal following – as well as one of the most impressive track records in the industry.