Analysts have been calling on the company for some time to distribute a chunk of its massive cash holdings. The company initially urged patience but had promised in recent months that it would offer a plan for the cash before an analysts' meeting next week.
Microsoft said it will spend about $14 billion over four years in boosting its dividend to a total of 32 cents per share a year, essentially doubling the past year's dividend of 16 cents per share. The company expects to spend $32 billion on the one-time payout and $30 billion on the stock buyback.
As of March, Microsoft had $56.4 billion in cash and short-term investments. In addition, analysts say the company generates in the range of $12 billion a year in cash, meaning that even with the buyback and dividends, the company should have plenty of cash in four years' time.
A higher dividend, a stock buyback and a one-time payout had all been mentioned as possibilities, with most analysts predicting that a stock buyback was the most likely possibility. In the end, Microsoft chose to offer all three.
Executives said there was no easy way to choose among the various options for its cash and ultimately chose to try to make everyone happy.
"It's a pretty close call to try and figure out what's the best way to distribute this kind of value to shareholders," Curt Anderson, Microsoft's senior director of investor relations, said in an interview. "We tried to offer a plan that was as balanced as possible and viewed as acceptable by a wide range of (people)."
The one-time payout is conditional on shareholders approving changes to Microsoft's employee stock compensation plans that would adjust the plans to reflect the $3-per-share drop in value that will come from the payout, Anderson said. Assuming that shareholders approve the plan, the payout would be made on Dec. 2 to shareholders of record as of Nov. 17.
"We are confident in our long-term ability to grow revenue, profits and shareholder value through our innovation and execution," CEO Steve Ballmer said in a statement. "We have been successful in addressing a significant portion of our ongoing legal exposure, and all seven of our businesses are growing."
Ballmer said the company would continue to invest in its businesses, despite the payouts and buybacks.
The move comes as Microsoft has ended a good deal of its legal uncertainty, settling cases with rivals such as Time Warner and Sun Microsystems, reaching deals in a number of class action suits and having received a verdict, albeit one it is appealing, from the European Union.
"We have resolved the large majority of our legal issues, which the company has always said was a prerequisite to addressing our cash management plans," General Counsel Brad Smith said in a statement. "While we still have a number of legal issues, and we take them seriously, we have reduced the legal uncertainties facing the company, and we have a much clearer understanding of the potential risks involved in the cases that remain, such as the ongoing ."
Microsoft Chairman Bill Gates pledged all of his proceeds from the one-time payout--which could be more than $3 billion--to his Bill & Melinda Gates Foundation, whose charitable activities include funding research into diseases such as malaria and AIDS.
Shareholders appeared to applaud the news, sending Microsoft shares up 4 percent in after-hours trading. Shares changed hands recently at $29.48, up $1.16 from the regular-trading close of $28.32.
Microsoft's share price has remained relatively flat in recent years, prompting an ever louder call from analysts and investors for Microsoft to share its cash riches. Although Microsoft has essentially answered that call, Ballmer reiterated his belief that Microsoft can also continue to grow its business.
Ballmer said he is "confident" that Microsoft's growth potential is among the best.