Analysts call on Microsoft to spend cash

Ahead of upcoming meetings to discuss Microsoft's financial picture, financial analysts this week called on the software giant to use the company's massive cash hoard to boost the company's share price.

Securities analysts have long questioned Microsoft's fiscally conservative management regarding its huge $56bn cash stockpile and the billions of dollars it generates from ongoing operations. Microsoft has said that the money will be used to settle outstanding litigation against the company and pay related fines but has not offered any specific details.

Analysts speculated that Microsoft will discuss its plan to handle its massive cash position at its fourth-quarter earnings announcement on 22 July or a meeting of financial analysts on 29 July in Redmond, Washington.

Bernstein Research analyst Charles Di Bona sent a report urging Microsoft to consider a stock purchase plan or a special dividend to shareholders. Di Bona also said that Microsoft could boost its annual dividend, which Microsoft started giving out last year for the first time

"We strongly favour a combination of substantial share repurchases to reduce existing cash balances coupled with a meaningful increase in the annual dividend," Di Bona said in a report.

He called on the company to increase its dividend over time and periodically buy back shares using the money from the company's ongoing positive cash flow. The cash buybacks will increase the company's share price and the boosted dividend will make Microsoft's stock attractive to investors who seek regular income, he said.

Long-time Microsoft analyst Rich Sherlund, who works for Goldman Sachs, said that a multibillion-share repurchasing program would benefit the company's share price. Sherlund calculated that a $10bn stock repurchase program would boost earnings 10 cents a share on an annual basis.

"We believe management is motivated to improve their share price, so we have shifted our thinking over the past year in terms of how aggressive they might be in addressing the cash position," Sherlund said in the report. He noted that the company has not yet indicated its intentions.

Microsoft's stock price, which was $27 on Thursday, has trailed the Nasdaq composite index since the beginning of this year.

Microsoft could also spend its cash on acquiring other companies. Last week, the company disclosed that it held preliminary discussions with SAP over a merger of the two companies. Microsoft typically makes smaller acquisitions related to the purchase of specific technology.

Microsoft settled its legal disputes with Sun, signing a wide-reaching agreement in which Microsoft paid $1.95bn to Sun to settle all legal disputes. Microsoft is facing a $611m fee from the European Commission's antitrust regulators. Microsoft earlier this month appealed the antitrust ruling, which included a request to reduce or annul the $611m fine.

Martin LaMonica writes for CNET News.com