Microsoft's dividend increase: Sign of confidence or admission of defeat?

Redmond return of capital to investors generating plenty of interpretations

Microsoft's announcement Tuesday that it is raising its quarterly stock dividend for the first time in two years isn't playing well on Wall Street. In Wednesday early afternoon trading, shares (NASDAQ: MSFT) were down 69 cents, or 2.74 percent, from Tuesday's closing price of 25.15.

But the news initially sent shares up in after-hours trading Tuesday. All of which underscores the varying interpretations of the dividend increase's meaning (not to mention the impossibility of predicting how the stock market will react).

For example, this non-bylined Associated Press article suggests the increase to 16 cents per share from 13 cents per share is a sign that Redmond "is feeling more confident that the economy won't lapse back into recession."

On the surface, it might seem so. Microsoft only began issuing quarterly shareholder payouts in 2004, raising the amount four times through 2008. Then it went two years without a dividend hike, a period that corresponds with the sharp economic downturn, massive layoffs and crumbling consumer confidence.

Now, with the recession having been declared officially over 14 months ago (even though it doesn't feel like it), Microsoft is willing to give some of its $37 billion in cash back to shareholders as the good times begin to return. That's one view.

Another is that Microsoft was under pressure to return capital to shareholders impatient with the company's stock price -- down 17 percent this year and about the same as it was eight years ago -- and its unchanged dividend payout. This theory suggests Microsoft's move was made out of weakness.

Of course, there's weakness and there's weakness. And according to Doug McIntyre at 24/7 Wall Street, the "Microsoft dividend increase is a sad admission of defeat."

McIntyre's argument is that Microsoft needs to grow -- he notes that revenue and earnings have been stagnant for the the past two years (here's some data) -- and the best way for it to grow is through acquiring technology. But for some reason Microsoft has been choosing not to, "while many of its rivals have made strings of acquisitions."

"In a world where a number of companies could augment Microsoft’s businesses, it has not found any worth buying," he writes.

So is Microsoft's dividend a sign of optimism and strength or a sign of weakness? I'd love to hear your thoughts.

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