Financial

Policies
Corporate Finance FIN201
of Microsoft

By: Du Yan
Lim Chuan Ming
Marcus Ang
Ong Sheng Fang Daniel
Puan Ying Peng

Company Profile
Overview of Microsoft

Company Profile
Overview of Microsoft
Revenue Contribution (Geo.)

Revenue Segments

Productivity and business processes

Office 365 commercials; Office 365 consumers; Customer Relationship

Management services

Intelligent Cloud

SQL; Window servers; Microsoft consultation services

More personal computing

Windows OEM licensing; hardware and software; Advertisements

Shareholder Composition

Asset-in-place status

Company Profile
Competitors
Sector

Industry
Classification

Technology

Software
and
services

156,917
Million

Asset-inplace

AA -

Technology

Software
and
services

145,813
Million

Asset-inplace

AA-

Technology

Software
and
services

52,238
Million

Growth
option

A-

Technology

Software
and
services

50,755
Million

Growth
Option

NR

Market Cap

Growth Profile

Credit Profile

Company Profile
5 year plan

Adopt incremental innovations

Strengthen the relevancy of existing P&S amidst competitive software and IT
environment

Integration of firms P&S

Integrate firms P&S into a cohesive ecosystem in a bid to replicate the retention
strategy that Apples P&S ecosystem has with its customer base

Breakthrough innovation
Focus R&D efforts into breakthrough innovations in areas of security, business data,
and analytics for future revenue growth

With 48% of enterprise value attributing to value of growth option.

Competitors
Sector

Industry
Classificati
on

Market Cap

Growth
Profile

Credit
Profile

Technology

Software &
Services

156,917 Mil

Asset-In-Place

AA-

Technology

Software &
Services

145,813 Mil

Asset-In-Place

AA-

Technology

Software &
Services

52,238 Mil

Growth
Option

A-

Technology

Software &
Services

50,755 Mil

Asset-In-Place

NR

5 Year Plan
Adopt incremental innovations
Strengthen the relevancy of existing P&S amidst competitive
software and IT environment
Integration of firms P&S
Integrate firms P&S into a cohesive ecosystem in a bid to
replicate the retention strategy that Apples P&S ecosystem has
with its customer base
Breakthrough innovation
Focus R&D efforts into breakthrough innovations in areas of
security, business data, and analytics for future revenue growth

With 48% of enterprise value attributing to value of growth option

Capital Structure
Decision of Microsoft

Equity Financing &

Decision
History

Went Public on 13 March 1986

Never Issued any SEO Since
New Stocks Only Offered as Stock Based Compensation

Stock Based Compensation

Similar among peers
Retaining Human Capital
Alignment Management

Pass 5 Year Trend

2,690,000,000$
Microsoft

1,020,000,000$
Peer Group

3.52% & 4.39%

Increase

Debt Financing & Decision

Often engages in large issues of debt

Short-Term commercial papers & Senior Unsecured Bonds

Often engages in large issues of debt

Corporate acquisitions, Capital stock repurchases, Capital

Expenditure, Repayment of existing debt & funding of
working capital
Raised $19.75 Billion for the acquisition of LinkedIn on 1st
August 2016

Microsoft Comparison
Compounded Annual Growth Rate Comparison

Compounded Annual Growth Rate Comparison

Debt / Equity Ratio

Compounded Annual Growth Rate Comparison

Debt Financing & Decision

Reasons

Reflects the effects of ultra-low interest rate

environment
Issuing cash-like debt to increase war chest for general
corporate uses
Bucks prior trend of financing through equity issuance

Capital Structure
Evaluation
(Equity)

Follows Classical Pecking Order Theory

No need to issue equity due to strong reserve of

cash and easy access to debt (USD$113 Bil)

Sufficient cash for share buybacks & dividend

program (USD$26.98 Bil)

Avoid issuing unwarranted equity

Afraid to send wrong signals and result in

information asymmetry

Capital Structure
Evaluation
(Debt)

Tax Shield Benefits

Only USD $3 Billion is kept in US

Channelling cash from offshore account will be

subjected to 35% US Corporate Taxation

Capital Structure Evaluation

(Debt)

Low Interest
Rate
Environment

14.48
Interest
Coverage
Ratio

Easy Access to
Debt Market

Prime
Investment
Grade
Ratings

Recommendation

Moodys reviewing Microsofts ratings for a

downgrade

Microsoft coming close to the tipping point

of too much leverage

Lenders may perceive an increased risk of

Microsoft defaulting on debt obligations

May result in higher cost of debt or tougher

debt covenants like establishment of
sinking funds

Recommendation

Microsoft to continue its equity financing

policy

Microsoft to exercise prudence in its debt

policy

Slowing down non-binding commitments

like share repurchases

This avoids raising debt locally with harsher

terms

Payout Policy
Decision of Microsoft

Payout Policy
Assets-in-place

Growth
Options

Benefits of
payout

High

Low

Cost of
payout

Low

High

Payout

High

Low

Type of
payout

Regular dividends
/ share
repurchases

Special
dividends

Microsoft
An assets-in-place firm over a growth options firm

Experience lower costs of payout

Payout may be conducted in high amounts, e.g.

reflected by payout ratio

Payout may take the form of cash dividend /

share repurchases

Actual Payout Policy

Microsoft Payout (USD Millions)

Firm was first listed in 1986 but did not pay its first dividend
until 2003 28 years without a cash dividend

Consistent with the common practice adopted by

growth stage firms which focus on reinvesting resources
for R&D

Strategically sound decision as Microsoft becomes more

complex >> information asymmetry

Common Stock-Repurchased

Common Stock Dividends

Current payout policy involves mainly quarterly cash dividend

and share repurchases

Payout Policy Dividend Policy

Quarterly Dividends

Share Price

Stable Dividend Policy

Dividend consistently increasing from $0.08 to $0.38 in
the past 12 years
Microsoft has 14 business segments and operates in
several continents
Difficulty for investors to understand its business
Stable dividend policy addresses information
asymmetry concern from investors by showing an
indirect picture of firms performance
Absence of perfect market conditions from MMT
Share price increased significantly over the years

Quarterly Dividend Yield

Stable Dividend Yield

Yield remained largely
stable from 2009 to 2016:
A balance between
address concerns over
information asymmetry
and retaining enough cash
for operations

Payout Policy Higher Than

Peers
Dividend Yield

Generous payout policy

2 trends are identified:
High dividend yield of 2.70% vs. peer
group average of 2.67%
High payout ratio of 68.32% vs. peers
average of 46.69%
Growth options companies does not
have a payout policy

Dividend Payout Ratio

Interpretation
Reduce problem of overinvestment
Reduce chance of having too much
cash and investing in negative NPV
projects
Further reassures investors of
investment returns and positive effect
on share price (>300% increase from
2004)

Payout Policy Share

Repurchases
Alleviates Information
Asymmetry

No Obligation

Strong signals that management Firm has no obligation to stick

believes shares are undervalued.
to its share repurchases
Management can execute
repurchases at their own timing.
Share repurchase announced on 17th September 2013, worth US$40 Billion Share repurchase announced on 21st September 2016, worth US$40 Billion

Volume (000s)

Stock Price

+1.46%

Volume (000s)

Stock Price

+1.46%

Payout Policy Share

Repurchases
Share Repurchases (in Millions)

Consistent Repurchases
Microsofts repurchases has
been constant and generally
increasing.
Recently announced another
round of US$40 Billion USD
worth of repurchases

Microsoft Corporation

Oracle Corporation

International Business Machines

salesforce.com, inc.

Adobe Systems Incorporated

Indication that Microsoft has

the financial capability to
stick to its repurchase plans,
returning value to its
shareholders

Div Yield vs Share Repurchase

Investor Ownership

Dividend Clientele Effect

23%
Institution
Individuals
Public and others

2%

74%

74.21% are institutional investors

Pension funds
Hedge funds
Mutual funds
Preference for dividend
income due to tax exemption

Microsoft Payout (USD Millions)

Share Repurchase

Common Stock-Repurchased

Common Stock Dividends

General increasing trend of

repurchases
Sends signal of undervaluation
and restores confidence
Investors are able to delay their
taxable income on capital gains

Payout Policy Recommendations

Repurchase > Dividends

Gives firm additional discretion on timing and

amount to repurchase
No obligations to fulfil repurchases
Alleviates pressure on companys commitment
to the amount of payout.

Payout Policy Recommendations

Slowdown Repurchases

Continuous issuance of debt to finance payout

programs may create additional risk to
Microsoft and investors
Crossing the optimal debt usage point may
potentially attract incremental financial
distress costs
Offsetting benefits of using leverage

Payout Policy Recommendations

Retain Cash, Invest in R&D

48% of enterprise value attributed to growth

options
Investments in R&D or mergers with small tech
firms can help to accelerate greater future
profits
Providing returns in the form of capital gains
from future growth, rather than cash returns.

Summary
Equity

No need for equity

financing
Only issue shares for
stock based
compensation
purposes

Debt

Currently optimized

Payout

Hold common stock

dividend payout
constant

Additional may cause

unjustified incremental
Slowdown debt fuelled
cost
share buybacks
Avoid raising more
debt in US

Focus on growth
initiative

Thanks!
Any questions?