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Microsoft (NASDAQ: MSFT) has struggled with a stock price which is stuck where it was five years ago. The world’s largest software company’s revenue in its last fiscal year is not much different from it was two years ago. The same holds true for net income. Microsoft’s balance sheet has improved over the years and it has more than$37 billion in cash and short-term investments.

The puzzle that Microsoft still has not solved is how it will grow once the sales of its new operating system Windows 7 begin to level. The firm’s entertainment division, which includes its Xbox products, is not in a period of rapid growth nor are its online operations. Its server and business divisions will continue to be challenged by Oracle (NASDAQ: ORCL) SAP (NYSE: SAP) and others which target the enterprise software market.

Microsoft has taken on the characteristics of a utility more than the growth company that it was for more than two decades.

The company’s partial answer to slow growth is to increase its dividend, a way to make up for its moribund stock price.  Microsoft raised its dividend 23% recently to $.16.

Microsoft has elected not to grow through M&A while many of its rivals have made strings of acquisitions. The decision is odd because it has become customary among aged tech firms to use their cash and ability to raise debt to essentially “buy” growth by adding new businesses.

Analysts have pointed to a number of tempting Microsoft targets over the years. They include saleforce.com (NYSE: CRM), a large CRM software company, which has a market cap of $16 billion to Microsoft’s $218 billion. salesforce is still in a period of rapid growth. VMWare (NYSE: VMW), the leading software virtualization company, also would make a good fit for Microsoft. VMWare’s sales almost doubled from 2007 to 2009. The firm would give Redmond a strategic presence in the enterprise server industry and might be the platform for related products that could work on PCs and even mobile devices.

The Microsoft dividend increase is a sad admission of defeat. In a world where a number of companies could augment Microsoft’s businesses, it has not found any worth buying.

Douglas A. McIntyre