UPDATE 3-Microsoft raises payout 22 pct ahead of investor meet
* Raises quarterly dividend to 28 cents per share
* Investors set to quiz management on Thursday
* Shares rise 0.6 percent
Sept 17 (Reuters) - Microsoft Corp raised its quarterly dividend by 22 percent and renewed its $40 billion share buyback program, extending an olive branch to investors who are expected to grill its outgoing CEO on Thursday about a costly foray into mobile devices.
The surprisingly big hike brings Microsoft's dividend yield to around 3.4 percent, higher than those of major tech corporations such as International Business Machines Corp and Apple Inc.
But some investors may have held out hope for a bigger slice of the company's $70 billion cash hoard, now that activist investment fund ValueAct has an option to take a seat on the software giant's board and exert greater influence over the company.
The fund has not announced its goals. But people familiar with ValueAct's thinking say it questions Chief Executive Steve Ballmer's leadership and the wisdom of buying Nokia's handset unit to delve deeper into the low-margin hardware business, and that it wants higher dividends and share buybacks.
Microsoft's shares rose about 0.6 percent on Nasdaq late Tuesday afternoon.
"I expected ValueAct to push for a big lump-sum payment like they have in the past," said Fort Pitt Capital analyst Kim Forrest, who has not spoken with the fund.
"And this is Microsoft saying no."
A hotly anticipated investor meeting on Thursday will give Microsoft shareholders their first chance to press management on who may replace Ballmer, who has announced plans to retire within a year.
Ballmer announced his move just weeks after unveiling a 'One Microsoft' vision for the company to focus on hardware and cloud-based services. But poor sales of the Surface tablet, on top of its years-long failure to make money out of online search or smartphones, have cast doubt on the plan.
Others argue that the company should focus on its strengths in serving businesses and enterprises, rather than try to become a bigger consumer-arena player.
"They really need to address what Microsoft will look like in a few years, and what the end goal is," Forrest said.
ValueAct Chief Executive Jeffrey Ubben declined to comment about Microsoft during an industry event in New York.
AN OLIVE BRANCH
On Tuesday, Microsoft said it will raise its regular dividend, payable on Dec. 12 to shareholders of record on Nov. 21, to 28 cents per share and authorized a new share buyback program.
The 5-cent increase, worth about $400 million a quarter, was about 3 cents more than analysts had expected. The new share repurchase program, with no expiration date, would replace another set to expire on Sept. 30.
Barclays analyst Raimo Lenschow had expected an accelerated or expanded share buyback plan. But the slightly bigger-than-expected dividend increase may signal a willingness to bow to investors' demands.
"A major open question is the timeframe over which the company plans to utilize the new $40 billion authorization, as that will dictate whether the level of the annual buyback is changing," Lenschow wrote on Tuesday.
"While the size of the new buyback program appears on the lower end of investor expectations, which we had pegged at close to $50-60 billion, the lingering question around the timeframe of the program makes the comparison to expectations flawed."
For years, investors have called on Microsoft to return cash to shareholders rather than sink money into peripheral projects, and limit its focus to its vastly profitable Windows, Office and server products.
But this month, Microsoft said it will buy Nokia's phone business and license its patents for 5.44 billion euros ($7.2 billion), a hefty investment that some criticized as a foray into a field already thoroughly dominated by Apple and Google Inc hardware and software.
In the last two years alone, Microsoft has lost almost $3 billion on its Bing search engine and other Internet projects, not counting a $6 billion write-off for its failed purchase of online advertising agency aQuantive.
"We view this as a further indication that things are changing at Microsoft with respect to corporate governance that we believe could benefit shareholders over the next six to 12 months," Nomura Securities analyst Rick Sherlund said in a note.