Microsoft says it plans to return about £40.5bn to its shareholders over the next four years, including a one-off dividend of £1.60 per share.
The company's board of directors has also approved a regular quarterly dividend of 4p per share and a plan to buy back up to £8.6bn of Microsoft stock between now and 2008, company officials said.
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The announcement ends growing speculation over how and when Microsoft would begin to distribute its vast fortune, amounting to about £30bn in cash and short-term investments at the end of its last quarter.
It said the move was motivated, in part, by confidence in its ability to increase revenue and profit through innovation and new products. But the timing may also have been driven by its success in settling numerous lawsuits, reducing the likelihood of substantial litigation costs in the future.
Microsoft chairman Bill Gates called the move "a pretty exciting milestone". He said in a separate statement that he would donate his proceeds from the one-time dividend, worth about £1.6bn, to the Bill & Melinda Gates Foundation.
Microsoft has faced pressure from shareholders to repay some of the profits it has made, especially since its share price has remained relatively constant over the past few years. Ahead of the news, its shares on the Nasdaq (MSFT) closed at £15.35 on Tuesday, up 1.3% on the day. The stock leapt more than 5% in after-hours trading.
The company cited several developments that led it to believe the worst of its legal woes are behind it. In April it agreed to pay Sun Microsystems more than £1bn in a deal that ended Sun's antitrust lawsuit against the company. And last year it paid £406m to settle antitrust claims by America Online's Netscape division.
More recently, a US appeals court approved Microsoft's settlement with the US government in its long-running antitrust case. And the European Commission's case against Microsoft has reached the appeals stage, which means the penalties in that case are unlikely to escalate beyond what has already been recommended, said Brad Smith, Microsoft's general counsel.
The payback plan will not reduce Microsoft's spending on research and development, Gates said. He enthused about several upcoming products, including new versions of the company's SQL Server database and Visual Studio development tools, both of which are due for release next year after delays. Its online properties, including the MSN search engine, will be improved "in a pretty dramatic way," he said.
The one-off dividend, to be paid on 2 December, depends on shareholders approving an amendment to Microsoft's employee stock plan. When a company issues such a large, one-off payment, its shares typically decline in value by about the same amount. The proposed amendment is designed to ensure that Microsoft's workers are not "inadvertently disadvantaged by this process", the company said.
James Niccolai writes for IDG News Service