Can The $40Bn Buyback Put A Floor Under Microsoft Corporation (MSFT) Stock?

  • Microsoft has announced another $40 billion share buyback program.
  • No timeline has been provided for the duration of the program.
  • The move will boost investor sentiment and buy Microsoft some time.

Microsoft's (NSDQ:MSFT) recent announcement of a $40 billion share repurchase program, is essentially a repeat of their previous $40 billion share buyback plan that was started in 2013 and still has two more months left to run. This could play a significant role in bolstering its stock price. The stock is already trading very close to its 52-week high of $58.70, and Microsoft's decision to continue with a massive share buy program coupled with a dividend increase of 8.3% will definitely boost market sentiment.

Accrued Impact of Share Buybacks

Microsoft is no stranger to share buyback programs. The Redmond giant has been in the market continuously buying back shares, which has reduced the total outstanding shares from 9,886 million in 2007 to 8,013 million in 2016. This consistency has helped the company boost its earnings per share while also reducing dividend payout.

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At the end of the fourth quarter Microsoft had $113.24 billion in cash, cash equivalents and short term investments. It was during the fourth quarter that the company announced its decision to buy Linkedin for nearly $26 billion, one of the biggest buyouts in Microsoft’s history. But with $113.24 billion cash on hand along with a long term debt of $40.78 billion, Microsoft has enough firepower to go through with a buyback program in the order of tens of billions.

Also Read: Will The New China Strategy Drive Microsoft Corporation Growth?

Though the company has been under severe pressure due to declining revenues from Windows, their lead operating system whose fortunes have nosedived along with lower demand for PCs around the globe, Microsoft’s free cash flow touched $24.98 billion in the last fiscal.

Financing the Program: Debt vs. Cash

Microsoft didn't make it clear as to how they will be funding their repurchase. Most of their cash hoard is sitting outside the United States, and bringing the money back will mean additional tax liability. The company may chose to follow Apple’s footsteps to raise debt in order to fund its repurchase program, a better option out of the two.

There are parts of Microsoft that are growing at a fast pace, such as their cloud business, Office 365 and productivity related products. Much of that growth, however, is being offset by their declining Windows revenues, which has showed some resilience in the recent quarters, posting positive growth numbers for the fourth quarter, after declining throughout the year. More Personal Computing, the segment that is home to Windows revenues, reported $8.9 billion in sales during the fourth quarter a 4% decline compared to prior period.

Windows is the only large scale operating system in the world that still requires you to pay money for using it. Mobile operating systems have been free for long, and the days of ‘Windows for pay’ are obviously numbered. But for now, Windows still remains the king when it comes PCs, and they are able to get away with the charge.

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The good news for Microsoft is that PC sales, which declined at a rapid pace since 2011, are expected to further decline at a much slower pace. The number is expected to hit 254 million shipments in 2020, down from 260 million in 2016. This will be great news for Microsoft as they can expect a slight decline in Windows revenues instead of a sharp one. More personal computing is still the lead earner for Microsoft, but at the rate at which cloud and other parts of its business are growing, it is not going to remain in the lead for a long time.

Why Microsoft Needs this Program

The key consideration is that stable revenue growth is still many miles away from Microsoft because, initially, new revenue streams will only replace old ones, not exceed them. With such a big cash pile, it would have been bad move not to use the cash towards a share buyback program as the company waits for sales growth to return. The key motivation underlying this decision to repeat its previous program is to keep investor sentiment positive as Microsoft approaches the close of yet another quarter this month. Their assumed intention is to provide a solid floor for the stock as they end the quarter, so 1Q-17 should have some interesting numbers.

Also Read: Microsoft Corporation Is Closer To Its 'Cloud First Mobile First' Dream

Intelligent Cloud and Productivity and Business Process are just $2 billion away from More Personal Computing in terms of revenue generation, and with PC sales expected to be relatively stable Microsoft has the best chance to push Windows revenue further to the background over the next four quarters.

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Comments on this article and MSFT stock

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harshal.patel.1
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Good article; if I held MSFT stock, I would rather them buy back shares versus purchased LinkedIn for an insane valuation.

There is no way LinkedIn was worth 5% of MSFT (based on current $447 billion market cap)
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