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How Microsoft Might Spend Its Repatriated Cash

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Debt repayment could dominate repatriated cash

Earlier in this series, we looked at Microsoft’s (MSFT) position among the top 16 US companies that collectively have $1 trillion in cash. A survey by Bank of America Merrill Lynch (BAC) in late 2016 highlighted companies’ priorities in using overseas cash. Debt repayment emerged as the first priority. Share buybacks and M&A (mergers and acquisitions) followed in second and third place, respectively, as you can see in the chart below.

Recently, a Goldman Sachs (GS) analysis reported that the tax reform initiative could increase corporate buybacks in 2018 by $75 billion to reach $590 billion.

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Debt lowering and increased buybacks could be in the cards

Considering debt repayment is a priority, Microsoft could be planning to lessen its debt load. Despite having significant cash reserves, Microsoft resorted to debt in order to finance the acquisition of LinkedIn to avoid a hefty tax bill and take the benefit of a low interest rate environment.

Currently, Microsoft has about $90 billion in debt with a TTM (trailing 12-month) cash flow of $40 billion. Microsoft could aim to retire some of this debt and match the results of the S&P (VOO) companies polled above.

In its capital return program, Microsoft’s inclination has been more toward dividends than share repurchases. In the last 12 months, it has repurchased shares worth $10 billion and returned $12 billion in dividends. With a dividend yield just under 2%, an increase in the quarterly dividend could be a likely scenario for Microsoft.

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