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Microsoft Considers $10 Billion Dividend
Dreadnougat writes "Microsoft is considering paying out a $10 billion dividend, the largest corporate payout ever. Cynics (ok, anyone reading /.) might note that Bill Gates stands to make $1.18 billion himself off the $1 a share dividend, in comparison to the $95 million he makes in a normal year off the regular 8 cents a share dividend."
Actually, it's probably both.
When MS stock was ascending in value, it was worth Gates' while to not pay a dividend, because he'd have to pay taxes on on any dividend he earned from it. He didn't have to pay taxes on the stock as long as he didn't sell it.
Now that the price is stable, if not dropping, he's better of paying the dividend, because even though he has to pay taxes on it, he gets money out of MS before his stock loses any more value.
No, dividends are taxed at the (now reduced) capital gains rate, instead of the ordinary income rate.
There's exactly two legitimate bases for stock valuations: one is dividends, the other is a cycle of systematic buy-backs and new issues.
Absent either of those two options, what have you got? You've got someone saying to the market "Hey, loan us some money. We never intend to repay, but perhaps you can sell our note to someone else for a profit."
The tax on dividends has not been eliminated. It has been reduced to a maximum of 15%. Previously dividends were taxed as ordinary income (max rate 38.6%).
Bill Gates is not evil, but Bill Gates is certainly not the poster child for meritocracy either. Bill's dad was a top-notch lawyer in New York. This gave him a top-notch education to begin with and an easy access to capital. Please, don't make it sound like everyone could have done what he did.
Over 600 million each donated to child health, and HIV/AIDS/TB. As staggering as the absolute magnitude of those numbers are, even in percentage terms they are quite remarkable. Given his total career earnings of, say, $50 billion or so (to date), this represents more than 1% to each of those causes.
To put it in perspective, do you know any other moderately well off computer geek, who may make $3 million in their career, pledging 1% ($30,000) to each of those causes? He's also indicated that global HIV/AIDS/health is a top priority, so expect him to give a lot more in that area before he's done.
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You clearly are not a Microsoft employee, nor do you know too many Microsoft employees.
Yes, the long term employees are filthy rich and never have to work another day in their lives. Pumping up the value of the stock doesn't change that fact in any way, shape, or form (if anything, it makes them even MORE filthy rich once they decide to retire and sell all their stock, which makes them more likely to retire in the first place).
Those who are not filthy rich are very happy to work there, because it is a great work environment, and the pay is damn good. Trust me, I know. Say what you will about their software - they treat their employees like gold.
Stock price is justified by the profit potential of a share. For instance, if you expect a share to yield 6 cents of profit per year, and current interest rates is 3%, you'd be ready to spend $2 for that share (3% of $2 is 6 cents). (This simplistic calculation needs of course need to be adjusted for risk: you expect your shares to pay higher interest rates than your savings account, because they carry higher risk ==> so you'd probably put a price less than $2 on the share..)
For a non-growing share, all profit you can expect from a share is dividend. Thus higher dividend means better share price.
For a growth stock, profit is not only the dividend, but also the price increase of the share itself. In a way, the share price feeds itself... until the bubble bursts. That's why until recently, MS didn't pay any dividend at all: its exponential growth was justification enough for its "value". However, since 1999, MSFT's share price has been more or less flat (or even, falling), thus growth can no longer justify what little value remains. MSFT has to pay a dividend to stop the downfall.
Of course, smart economists may realize why MSFT is paying these huge dividends (because the stock would suck otherwise), and the move might have just the opposite effect...
Bill Parish has an interesting writeup about this. The report is quite old (November 1999), so many of those things that have already come to pass are still predictions...
A more up to date press list can be found here (not all references articles are about MSFT, but most are...)