Microsoft could use some self-inflicted activism

Microsoft needs to become its own activist. The software giant now has more than $50 billion in net cash on its balance sheet. Tax changes will boost its hoard even faster. With debt easily manageable, the company ought to boost dividends and buybacks, before pushy investors force it to.

The growth of cloud services is a strong wind at the $800 billion company’s back. Businesses are rapidly switching to online versions of Microsoft’s Office, customer-relationship and other enterprise software. As they do that, they also tend to buy more online computing, storage and other services from the company run by Satya Nadella.


Last quarter’s results unveiled on Thursday, for example, show enterprise sales of Office 365 up more than 38 percent from 12 months ago, while revenue from Microsoft’s cloud-computing platform almost doubled. This helped deliver total revenue just above $30 billion, 17 percent higher than the same period last year.


There seems little chance of that fading any time soon. That leaves the company’s balance sheet looking oddly out of date. The majority of Microsoft’s earnings come from overseas. It was too punitive to repatriate these until last year’s changes to the U.S. tax code. Now the company has far more ready access to the greenbacks.

Microsoft’s operations threw off over $31 billion of cash over the past 12 months after subtracting capital expenditure. It paid out $12.7 billion in dividends and $10.7 billion in buybacks over that period. That gave it enough to buy programming repository GitHub for $7.5 billion and still not tap its cash pile.


There’s little reason for the company to be adding to its cash hoard. The company’s size and its triple-A rating from S&P mean it can borrow for long periods of time incredibly cheaply. At present, though, it’s paying down debt, which now stands at just 1.5 times expected EBITDA for the next fiscal year.

Microsoft typically ups its dividend and buyback plans each October. Analysts estimate the company should generate around $38 billion in free cash flow next year alone. Doubling how much it returns to shareholders, to about $47 billion, would still leave the company’s balance sheet with net cash. Microsoft is incredibly conservative, but it’s time for Mr. Softee to loosen the collar.