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Lindley Estes is a business writer for The Free Lance-Star and Fredericksburg.com. This blog is on Fredericksburg-area business. Send an e-mail to Lindley Estes.
This week’s investing column (9/26)
MICROSOFT Corp.’s sale of $4.75 billion worth of bonds this past week is interesting on at least three levels.
The tech giant sold bonds with maturities of three, five, 10 and 30 years. The three- and five-year bonds had yields of about 0.9 percent and 1.6 percent, respectively. Both were record lows.
News of the sale raised three thoughts in my mind that I will discuss in turn:
1. Why would investors buy these bonds instead of Microsoft’s stock?
2. There is an amazing disparity between the haves and have-nots these days when it comes to tapping financing.
3. What are Microsoft’s plans for the cash it raised?
Bonds over stock
In addition to deciding to sell debt, Microsoft’s board of directors raised the quarterly dividend on the company’s common stock to 16 cents a share from 13 cents. That’s up about 23 percent.
Based on the price as of this writing (1 p.m. Friday), Microsoft’s common stock now yields about 2.6 percent. That means there were bond buyers this week who accepted a yield that is about one-third what they could have gotten from the stock.
To me that makes no sense and shows how worried people are about the fate of corporate America. I made a similar point a few weeks ago when Johnson & Johnson sold debt at yields similar to Microsoft’s.
It’s true that bondholders receive more protection than common-stock investors in the event of corporate bankruptcy, and that a company can cut its dividend at any time but must keep paying the bondholders.
But bondholders receive little opportunity for capital gains. And despite fierce competition from Google and Apple, it’s not as if Microsoft is at risk of failure any time soon. It remains a cash-flow star that has $37 billion of cash on its balance sheet. It’s one of just four companies to receive Standard & Poor’s top rating; the others are Johnson & Johnson, Exxon Mobil and Automatic Data Processing.
In other words, Microsoft should have the financial wherewithal to keep making its dividend payment and likely increase it in the future. Bondholders will receive no such benefit.
Haves and have-nots
Microsoft’s debt sale also shows the inconsistency of today’s credit markets.
Nervous investors are lining up to take pitiful yields on investments such as U.S. Treasury bills, bank CDs and short-term bonds of strong companies like Microsoft. That makes it exceedingly cheap for these companies (and the federal government) to issue debt.
On the other side are the small businesses that continue to report that they can’t get credit even though banks profess a desire to make loans. These businesses argue that their inability to get financing is preventing an economic recovery.
The most intriguing part of Microsoft’s debt sale, to me, is trying to figure out the company’s plans for the money it raised.
The firm said it could use the funds for working capital, capital expenditures, stock buybacks, dividends or acquisitions. But as stated earlier, Microsoft already has $37 billion in the bank–seemingly enough for all of the above and then some.
Much of that cash is parked overseas, however, and Microsoft would have to pay U.S. taxes to “repatriate” it if the firm wanted to use the money for dividends or stock buybacks. Raising debt avoids that problem.
The debt sale also makes one wonder whether Microsoft has its eyes on a possible merger. One especially intriguing candidate could be Facebook. Microsoft paid $240 million for a 1.6 percent stake in Facebook in 2007. Forbes magazine estimates Facebook’s current value at $23 billion.
Facebook would be attractive to Microsoft on many levels. The social networking king recently passed Google as the most-viewed U.S. website. That means more people are using Facebook’s search engine to find what they’re looking for on the Web and keeping up to date on news that matters to friends.
Microsoft for years has been trying to compete with Google on Internet search. The company could integrate its Bing search engine into Facebook, giving it a huge boost in market share.
There would be benefits to Facebook from such a union, also. Mark Zuckerberg and crew could immediately cash in their privately held Facebook shares. The firm would save money avoiding an initial public offering. And the reticent Zuckerberg could focus his energies on building the business rather than using his time talking to Wall Street analysts and the media, both of which come from being CEO of a publicly traded company.
This is all highly speculative and may have zero merit. But Microsoft’s decision to sell debt despite drowning in cash makes you wonder.