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| * data as of 10/19/05 | | Source: Thomson/Baseline |
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NEW YORK (CNN/Money) – Tech investors should unite and in one loud voice cry out the words made famous by Cuba Gooding Jr.'s Rod Tidwell character in "Jerry Maguire."
SHOW ME THE MONEY!
It is inexcusable that more cash-rich tech companies are not rewarding their shareholders with dividends. During the past few years, Microsoft (Research), Qualcomm (Research) and chip equipment firms Applied Materials (Research) and KLA-Tencor (Research) began to pay a dividend. And media firms like Viacom (Research) and my employer Time Warner (Research) (which owns CNN/Money) have also started to pay dividends.
But several companies that can clearly afford to pay a dividend, firms like Apple (Research), Cisco Systems (Research), Dell (Research), Electronic Arts (Research) and Oracle (Research), have chosen not to. Each company has little debt and billions of dollars in cash on their balance sheet.
"More tech companies ought to be paying dividends," said John Snyder, manager of the John Hancock Sovereign Investors fund, which mainly invests in dividend-paying stocks. He owns Microsoft, IBM (Research) and Automatic Data Processing (Research), which all pay dividends. He also owns Cisco and Dell and he singled them out as two companies that should pay a dividend.
"Why do they need all this money? Are techs keeping cash due to uncertainty in the markets? Maybe. But I think there's no reason why techs are keeping as much cash as they are," Snyder said.
Hopefully, the stingy attitude of some techs will change soon.
"There is a distinct possibility you will see more very large tech companies paying a dividend. It's a reflection of the continued maturation of these companies," said Chuck Carlson, chief executive officer and portfolio manager with Horizon Investment Services, a Hammond, Ind.-based money management firm that also publishes the "DRIP Investor" newsletter about dividend reinvestment plans.
Many techs aren't the growth companies they once were
Oracle CEO Larry Ellison hinted at its annual meeting last week that the company might consider a dividend once it feels that the pace of consolidation in the software industry has slowed. Oracle has been a voracious acquirer during the past few years, scooping up PeopleSoft, Retek and Siebel Systems (Research).
It would be nice for Oracle -- and many other large techs -- to begin paying a dividend. Because -- let's be honest -- for many large tech companies, their best growth days are behind them. So there's no shame in admitting that you're mature.
"Tech has become demystified," said Bartlett Geer, manager of the Putnam Equity Income fund, a fund that also primarily invests in stocks with dividends and owns shares of dividend-paying techs Microsoft, IBM, Hewlett-Packard (Research), Intel (Research) and Motorola (Research).
Geer said that larger techs don't need to hoard as much cash for research and development or acquisitions once they reach a certain size.
"Historically, techs have kept a lot of cash and admittedly when you're small you need more cash. But as you get larger and have more diversified stable revenue streams, your business becomes more predictable and the liquidity cushion is not as high," he said.
Typically, tech companies and investors have argued that a dividend is not a good use for cash because it's better to spend money on share buybacks, which in theory should boost earnings per share by lowering share count.
That works to a certain extent. But many techs have used buybacks merely to offset the potential dilution from options grants. So buybacks may not be as much of a reward as you'd think. A dividend, on the other hand, is something tangible. And often, investors can use the dividend income to invest more in the stock they own.
In addition, the 2003 tax cuts on dividend payouts has made dividends a tax-friendly option for investors.
Dividends don't equal death
Finally, it's just silly to think that once a company begins paying a dividend, it is completely throwing in the towel on growth. A large company like Motorola, for example, has clearly been able to invest in acquisitions and new product development while also paying a dividend.
To that end, shares of several dividend-paying tech firms have actually been much better investments lately than techs that don't pay dividends -- proof positive that earnings growth and favorable sentiment from investors won't evaporate just because of a dividend.
Motorola, Hewlett-Packard, Texas Instruments (Research) and National Semiconductor (Research), which all pay dividends, have been among the best performing tech stocks in the S&P 500 this year. Meanwhile, Cisco, Dell and Oracle have slumped.
What will it take for techs to get the message about dividends? Snyder thinks that more investors will demand the security of dividends since the economy (and possibly earnings growth) is expected to slow a bit next year.
"Are we on the next wave of a huge increase in capital expenditures? Probably not. So earnings will just be okay," Snyder said. "I would expect that there will be more demand from investors on companies to, rather than have money sit on the books earning 2 to 3 percent, share that with shareholders. The pressure will continue to mount."
Still, some fund managers think that tech companies won't face as much pressure to pay dividends because tech investors, by and large, are more momentum oriented. So there might not be a big rush by techs to make the payouts.
"It will be a slow evolution," said James Denney, president of Mohawk Asset Management, which runs the Electric City Value and Electric City Dividend Growth funds. "Dividends are a long-term investor's focus and for folks that are more short-term oriented it's not essential. And let's face it. A lot of tech investors tend to be shorter-term investors than average investors."
But Geer said that many large-cap techs are now attractively valued for the long-term but that when push comes to shove, he is more likely to buy a stock that pays a dividend over another non-dividend payer with similar growth and valuation characteristics.
"The yield breaks the tie," he said.
For a look at more tech blue chip stocks, click here.
Tech investors wait for a rebound. For more, click here.
The reporter of this story owns shares of Time Warner through his company's 401(k) plan.
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