NEW YORK (CNN/Money) -
What happened to all the technology companies that were going to start paying dividends once President Bush's economic stimulus package was passed?
The president first proposed dividends tax relief January 7, sparking discussion of whether or not tech titans would finally start paying dividends. Nine days later, Microsoft announced it would pay a dividend. Qualcomm followed suit in early February.
But so far Microsoft and Qualcomm are still the only two major tech firms to have announced this year that they would begin paying dividends.
Cash-rich techs can afford to pay up
It is true that the tax cuts that were part of the package approved by Congress in May were not as high as the president initially called for. But the taxes on dividends are no longer so onerous that it would make payouts a bad use of tech firms' cash.
With that in mind, tech companies with strong balance sheets, like Cisco (CSCO: down $0.35 to $17.51, Research, Estimates), Oracle (ORCL: down $0.28 to $12.17, Research, Estimates), and Dell Computer (DELL: down $0.51 to $31.98, Research, Estimates), may face renewed pressure to start paying dividends. And companies like Microsoft, IBM, Intel and Qualcomm, which have dividends that yield less than 1 percent, could come under fire for their relatively low payouts.
|†* as of the end of their most recent quarter|
|†Sources:††Thomson/Baseline, Multex Investor|
"I have to assume that dividends is a big conversation in boardrooms right now," said James Denney, manager of the Electric City Dividend Growth fund, which invests in dividend-paying stocks. "I don't get the sense that companies need all this money for research and development and buying back stock."
However, tech companies might need the money for acquisitions, as the pace of mergers heat up in the sector. Oracle has launched a $6.3 billion all-cash hostile bid for rival software developer PeopleSoft (PSFT: down $0.17 to $17.81, Research, Estimates). As of the end of May, Oracle had $6.8 billion in cash and investments on its balance sheet, which doesn't leave much room for a dividend.
Zach Shafran, manager of the Waddell & Reed Advisors Science & Technology fund, said that companies like Oracle might be better off holding onto cash in case they need to use it for deals. After all, Wall Street usually punishes dividend-paying companies that suddenly decide to suspend or cut the dividend.
"You can always pay a dividend but once you start, it's hard to stop," Shafran said. "Is paying a dividend in the long-term best interest of tech companies? That question is still up in the air."
Dividends still viewed as a sign of slowing growth
There is another reason that techs have been unwilling to pay dividends. They are a sign of a stable, mature company -- not that there's anything wrong that. But the fact that a company is willing to give back some cash to shareholders instead of reinvesting it in the business is almost a tacit admission that its best growth days are behind it.
And there does seem to be a ring of truth to that argument. The long-term estimated earnings growth rate for Microsoft (MSFT: down $0.46 to $26.42, Research, Estimates) is just 12 percent annually, compared with 17 percent growth over the past five years. Earnings growth for Qualcomm (QCOM: down $0.29 to $37.45, Research, Estimates) is expected to slow as well, from an average of 36 percent over the past five years to 19 percent over the next three to five years.
In fact, according to Thomson Financial/Baseline, the average long-term earnings growth rate for the 49 dividend-paying tech companies with a market value of at least $200 million is 15 percent. The 450 tech companies that don't pay a dividend are expected to post earnings increases at a 21 percent clip.
And so far this year, investors have demonstrated that dividends don't make tech stocks more attractive. While the 49 dividend paying techs are up, on average, a more than respectable 27.4 percent year-to-date, the techs without dividends have doubled that performance, with an average 55.5 percent increase.
"Most tech companies are excited about the opportunities in front of them, maybe more excited than they should be," said Michael Cohen, director of research for Pacific American Securities. "It's more likely that tech companies paying dividends already may increase them as opposed to many tech companies paying new dividends."