Microsoft hikes dividend but questions abound

(MoneyWatch) Microsoft (MSFT) announced that it will boost its quarterly dividend by 22 percent to 28 cents a share. The company will also institute a $40 billion share buyback, without an expiration date, to replace one started in 2008 that was to end this month.

The moves are an attempt to please many investors who are disenchanted with the company's performance and who wanted some of the company's massive cash and short-term investments -- more than $77 billion, according to stock information site YCharts -- turned over. But this is only a temporary fix for shareholders who are dissatisfied. Microsoft's board and management team will need to answer tough questions and develop a coherent strategy that will make sense -- and work.

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This is the eighth time Microsoft has boosted its dividend since 2004. Raising dividends isn't unusual for more mature companies. It is way to pass value on to shareholders. A stock buyback often has the same effect; by creating demand for shares, prices typically rise, providing more value for investors.

But Microsoft has more on the line than a need to push some dollars over to shareholders. The company has thrashed about for years and continues to be troubled:

• The company's mobile strategy has taken its lumps, as Microsoft had to take a $900 million inventory write down on its Surface RT -- the device that was supposed to most directly compete with iPad and Android tablets. (The more powerful regular Windows 8-based devices were an attempt to create another level of tablet.)
• CEO Steve Ballmer set off a major reorganization in an attempt to have Microsoft become a devices and services company. However, while that model sounds like what Apple (AAPL) or Google (GOOG) do in mobile, it doesn't adequately address the significant corporate computing part of the business.
• To support the devices and services approach, Microsoft agreed to buy Nokia's devices business, even though Nokia has seen an extended slump and Microsoft has yet to prove, outside of the Xbox franchise, that it can effectively make and market phones or end user computers.
• With all the recent changes, Ballmer has announced his retirement within the next year.

This is a strange combination of conditions. Microsoft clearly needs some significant changes in strategy and has undertaken some bold, if not entirely convincing, moves. And yet, even as the company does so, the CEO -- titular head of strategic direction -- announced that he would leave. A new CEO will have to work within the bounds of what Ballmer left, which is a massive set of handcuffs.

It may be that Microsoft needs a significantly different strategy. Should it split into two companies -- a consumer device and services unit and a separate business that focuses on corporate computing? Does Microsoft need to seriously revise pricing of Windows Phone and Windows 8 to attract and motivate device manufacturers, or has the intent to build its own devices completely undercut partnerships? Are there any business models other than directly charging for software that could help sustain revenue?

The board and Ballmer have effectively precluded a fundamental reassessment of the company and a strategy that will work going forward in turbulent times. In other words, Microsoft has, once again, shot itself in the foot.