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Personal Finance > Investing
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Pay up!
The time has come for some stable large-cap tech companies to start paying dividends.
October 10, 2002: 3:30 PM EDT
By Paul R. La Monica, CNN/Money Staff Writer

NEW YORK (CNN/Money) - Hey Microsoft, Cisco, Oracle and Dell! Give us some money!

None of these technology giants offers investors a dividend. But all of them, despite massive drops in their stock prices, are still stable market leaders with healthy balance sheets. As a result, some money managers think it's time for them to suck it up and start doling out some of their earnings to shareholders.

"Pretty soon investors are going to start saying, 'If you want my money you've got to pay me a dividend so I can cover my living expenses while I wait for you to invent the next big thing since sliced bread,' " said Alex Vallecillo, senior portfolio manager with National City Investment Management.

The times they are a-changin'

During the bull market, most investors didn't care about dividends. And tech companies claimed that since they were growth companies that needed to invest heavily on research and development, giving money back to shareholders was not the best way to use their profits.

Ten techs that should pony up
These profitable companies could probably afford to pay a dividend
Company Cash* Long-term debt* 
Applied Materials $4.9 B $579 M 
Cisco Systems $12.7 B $0 
Concord EFS $1.9 B $126 M 
Dell Computer $4 B $516 M 
Electronic Arts $832 M $0 
Intuit $1.3 B $15 M 
Maxim Integrated $766 M $0 
Microsoft $38.7 B $0 
Oracle $6.4 B $311 M 
Qualcomm $2.4 B $0 
 * As of the end of the latest quarter
 Source:  Multex Investor

To a certain extent this has been, and in some cases remains, a legitimate argument.

"If you're a cereal company it's not likely you're going to have fifty companies run out of a garage nipping at your heels. Tech companies do have to continue to innovate," says James Denney, manager of the Electric City Dividend Growth fund, part of money management firm Mohawk Asset Management.

But he says this logic goes only so far. Companies like Microsoft and Cisco are not exactly young upstarts anymore. They are mature companies. And as the bear market of the last three years has painfully proven, technology is an extremely cyclical business. So one way to help make stock declines less distressing is to provide investors with the stability of a dividend.

According to data from Multex Investor, only 17.5 percent of technology companies with a market value of at least $500 million pay a dividend. But more than half (52.6 percent) of all other companies of a similar size pay one.

Even though tech companies might lose some momentum-oriented investors if they start paying dividends, that likely would be outweighed by an influx of new money from more value-oriented investors who will buy only stocks that pay dividends, says Andy Pratt, manager of the Montgomery U.S. Focus fund and Montgomery Growth fund.

"Given the current market environment and where valuations are, for companies with big cash hoards to start paying a dividend right now it would be viewed as a big positive," Pratt says.

Intel and IBM already do it

Several prominent tech companies, including Intel, Motorola, IBM and Adobe, already pay dividends. So for Microsoft or Cisco to begin doing so, it's not as if they'd be breaking some taboo against tech dividends.

So what other tech companies probably could afford to start paying dividends?

CNN/Money.com ran a screen to look for profitable mid-cap and large-cap tech companies with healthy piles of cash and little debt. In addition to Microsoft, Cisco, Dell and Oracle, companies such as Applied Materials, Electronic Arts and Qualcomm came up.

And it's not as if money managers are clamoring for REIT-like yields. (Real estate investment trusts, or REITs, in order to qualify for more favorable tax treatment, pay more than 90 percent of their earnings back to shareholders as a dividend.)

Denney says that tech companies could even pay a so-called "special dividend" if they are worried about being able to sustain a regular payout during down markets. Special dividends are non-recurring payments to shareholders that companies sometimes decide to issue after exceptional years, akin to a performance bonus.

Unfortunately, it might take some help from Washington (good luck) to get tech companies to start paying dividends.

National City's Vallecillo says one reason techs have been reluctant to do so is their unfavorable tax treatment. Profitable dividend-paying companies pay taxes on the income they generate. But individuals who receive dividends also have to pay taxes on them. So dividends are essentially taxed twice.

There has been discussion in Congress about eliminating the double taxation. That could be done either by having the dividend portion of a company's profits be tax-free or to get rid of the tax that individual investors pay on the income they receive from dividends. Vallecillo says that if either change were enacted, more tech companies would pay dividends and that would be good for investors.

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Until a change in legislation though, tech companies are probably more likely to buy back their own stock to try to boost their stock prices. But the problem there is that share buybacks don't tend to be as beneficial to tech investors. The reason: The buybacks often are an attempt to counteract the effects of newly issued stock from options granted to employees.

"If the only purpose of a buyback is to reduce or eliminate the dilutive effect of stock option conversion then, as a shareholder, it does me no good," Mohawk's Denney said.  Top of page




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