Microsoft ( (MSFT): up $3.22 to $46.23), despite its ailing stock price, ended its fiscal year in June with $38 billion in cold hard cash, plus another $14 billion in equity holdings. That's more than the value of all of AOL Time Warner, which, with a market cap of $47 billion, is the 28th largest company in the S&P 500 (and parent company of this Web site). This is a perennial problem for Microsoft -- one that its top managers are certain to be grilled about Thursday at the company's annual analyst day at its headquarters. Even with the billions Microsoft has washed down the drain in failed investments (think: AT&T ( (T): up $0.26 to $9.06), its cash figure went up by $6 billion in the past year.

The problem is what to do with the cash. Some investors would love Microsoft to return the money to them in the form of a dividend. But as Michael Mauboussin, an analyst with Credit Suisse First Boston, argued in an excellent report this week, two shareholders who'd hate to see a dividend are Bill Gates and Steve Ballmer. Because dividends are taxed as ordinary income, Gates and Ballmer would have to pay taxes at a rate of 38.6 percent, compared with 20 percent for long-term capital gains. In Mauboussin's plan, Microsoft -- and other companies with huge cash positions -- should announce regular, planned, predictable and generous buybacks. This would act like a dividend because it would be returning money to shareholders by removing shares from the market and improving the value of each share.