Generally speaking you can differentiate companies into two different kinds.

- Huge assets, little growth

- Low assets, High growth.

The first are what you could call value stocks, the second growth stock.

The first is valued based on its past track record and how steady it is.

The second is valued on its future potential....

If you look at mutual funds or follow the stock market you will find those terms of 'value' and 'growth' often.

There are typically investors specializing in each kind.

Value investors focus on Price/book and what they think is the good price for the company based on what it has done so far and what it has on its book.

Growth investors focus on future P/E and growth potential...

During it's lifecycle a company usually starts as a growth stock and over time becomes a value stock as its growth slow down provided it has found a good market...

Microsoft was a growth stock for a long time but is actually now slowly becoming a value stock ( it does not have that much assets ( well it has a lot of cash in the bank which is assets in a way)  but Microsoft occupies such a key market of today's world that the possibility of the company suddenly crashing is very very low.........

When was this article written? 2006?

So investers generaly work with either kind of stock specialising in one or the other right ?

i'm guessing growth stock is potentialy more beneficial  value stock because of the potential risk of investment right ?

Why does microsoft have such huge reserves of cash , i'm guessing they have more than enough to cover the overheads of the business why don't shareholders pocket it ?

Microsoft used to have $20+ billion in cash. Since then, they gave most of it back to shareholders (damn, I wish I had had Microsoft shares at that time).

Because Microsoft makes HUGE pile of cash every year.

They used to have a crazy war chest but a few years ago they gave some back to the investors in the form of an exceptional dividend.

That's another reason they had such a huge pile, typically growth company don't pay much dividends to their shareholders, as their stock tends to perform better than value stocks and they feel there's no need for a dividend.

Shareholders can't pocket the cash like that, there's only 2 ways to return cash to them :

1) through a dividend, the issue is that aside from exceptional dividends which are very rare it then becomes a recuring dividend so the company has to give it every year and it's expected it will stay stable or raise every year. A dividend going down or not payed anymore is usually a sign of a company going bad. So once you start paying a dividend you have that amount of money going out to the shareholder every year and you can't hold onto that anymore if like say you wanted to acquire another company...

2) through a stock purchase plan. The idea is the company will spend cash to buy back some of the outstanding stock, raising the value of the stocks remaining on the market as a side effect ( if you have 1000 shares of a company and the company has a total 1 million shares outstanding and buy backs 100 000, suddenly instead of owning 1/1000th of the company you are now owning 1/900th).

@Ail: Microsoft still pays $4 billion per year in dividends I believe. That one-time dividend you talked about was much bigger though!

Almost :P

They used to have 60 Billion $ cash on hands before they gave some back to the shareholders.

They now have 'only' 30 Billion $ cash on hands ....

To add to what NJ5 said, massively profitable companies will sometimes keep large amounts of cash around for a few reasons:

1. They don't know what to do with it (see Blizzard)
2. They're planning on buying something really big soon (see MS and Yahoo!, even that deal was to be heavily financed by MS)
3. They're expanding into something new

But overall, companies try to keep very little cash on-hand. It's bad for them in a few different ways (the money doesn't grow, taxes, etc).

I see I had forgotten the enormity of the numbers

Rocket is totally true.

Usually company with low assets usually have more cash on hands though ( afterall, cash is an asset and when you don't have assets to sell in case you need extra cash, it's good to have the cash already there :P).