$32 billion Microsoft dividend: Who will benefit?

Your Money

IF YOU feel a disturbance in the Force, don't be alarmed.

The galactic $32 billion special dividend to be paid by Microsoft to its shareholders, the largest corporate payout ever, goes ex-dividend tomorrow.

That means buyers of Microsoft shares as of tomorrow will not be eligible to receive the special dividend, which is $3 per share for a stock trading at about $30. The payout was declared in July, to be distributed Dec. 2.

To give you an idea of the amount of money involved, if the $32 billion dividend represented a new company, it would be the 72nd-largest in the country.

What will happen to this huge transfer of cash?

There are three possibilities: an index fund holding Microsoft shares, an actively managed fund and individuals holding significant Microsoft shares.

Index funds pledge to match a stock market index, such as the S&P 500, that is weighted by the equity capitalization of companies in the index.

S&P is not counting the $32 billion as a regular dividend, to be reinvested in Microsoft shares. As a result, the market cap of Microsoft could fall in the index, slipping from second place, after General Electric, to third place, after Exxon Mobil.

S&P 500 index managers will redeploy the cash proportionally among 499 other stocks.

Active fund managers and individuals with hefty Microsoft holdings have more choices.

Standard & Poor's estimates that $10 billion of the $32 billion will go directly to individual investors, a tidy holiday windfall.

Jeremy J. Siegel, finance professor at the Wharton School of the University of Pennsylvania, reasoned that Microsoft shares rallied recently because traders "might be thinking that a lot of regular investors will be reinvesting in Microsoft." Shares hit a 52-week high last week.

But John B. Leo, director of growth equities at Northern Trust, a major holder of Microsoft, says professional investors are looking well beyond reinvesting.

"I'll take a look at what the rest of the cash flows look like and talk with my teammates," he said.

"There are five or 10 stocks in the portfolio that we've got our greatest conviction about. We might simply choose to spread it over those five or 10 names. They won't likely be all tech stocks."

Microsoft shares are down this year, not counting the $3 dividend.

"The tech stocks have not been a particularly hot sector," Leo said. "Any active manager might prefer to move that money to an area that's acting better or promises to do well through the balance of the year."

He mentioned industrials, financial services and retailers.

In redeploying the Microsoft special dividend, investors increasingly have one thing on their minds, dividends.

Dividend initiations and increases picked up this year, even among technology companies, in part because of the cut in the dividend tax rate. Intel has doubled its dividend twice this year.

Howard Silverblatt of Standard & Poor's said three of seven dividend increases this month were for tech stocks. Expect more in January and February, he said.

"There is a lot of pressure on companies to increase their dividends and justify the cash they have. Investors want total returns, dividends every quarter and capital gains at the end."

Bill Barnhart is a columnist for the Chicago Tribune, a Tribune Publishing newspaper.