Microsoft announced Tuesday it is renewing a $40 billion share repurchase program and issuing a quarterly dividend of $0.28 per share, moves that analysts say are intended to present the company, which is currently being restructured, as a solid investment.
The share repurchase program was set to expire Sept. 30. Microsoft's board of directors approved a new program without an expiration date. In the past fiscal year ended June, Microsoft bought $4.6 billion in share repurchases.
Usually a company looks to retain earnings if it is looking to grow, said analyst Roger Kay, founder and president of Endpoint Technologies Associates, Inc., a technology market analysis company. However, there comes a point, he said, when it has simply too much cash on hand and looks to return it to shareholders or acquire other companies.
"When companies retain earnings, it's a vanity, like a middle-aged man trying to look 20 years younger by entering an Iron Man [competition]. ... The vanity makes them keep the money on the books because they think they might use it," Kay said. "If you don't have to finance operations, the theory is you should pay the money out the shareholders and they will buy your stock."
On the news, Microsoft shares jumped less than half a percent. Kay said this signifies investors aren't necessarily buying that Microsoft is on the rebound just yet.
"The stocks up, but it's a bit. I think there's cynicism here in the market interpreting the results," Kay said. At the core of Microsoft's stock value is a question of innovation, he said. "Does the market believe they're innovating?"
Crawford Del Prete, executive vice president of worldwide research at IDC, said Microsoft is trying to demonstrate to investors that it is a steady and safe investment.
"What it basically says is, 'Come on in, the water's great, and over time we want to reward you as a shareholder,'" Del Prete said.
Microsoft is down, but not out of the game, Kay said. The company's recent Nokia acquisition and BlackBerry's sharp drop in market share has made Microsoft a possible contender in the mobile market, he said, but the bottom line is that the company still has a lot of drastic changes to make.
"There's a lot of different ways to slice it. I think Microsoft has a role to play and it has to pull its socks up and play," Kay said. "The real proof for Microsoft is in the technology. They can fiddle around with their cash or balance sheet, but that is a banker's job."
Microsoft, Del Prete said, has two options going forward: either strengthen and grow the existing company or break it apart into more manageable pieces. But in the meantime, he said, the company's goal appears to be establishing itself as both a strong player in the marketplace and a steady investment for shareholders.
PUBLISHED SEPT. 17, 2013