Has the time for Tech Dividends arrived?

The problem with tech stocks is that few have a "wide-moat". Many are subject to rapid technology obsolescence, which causes them to re-invest most of their earnings back into the business just so they could maintain their share in the market. Most large cap tech stocks have hoarded billions of dollars in cash on the balance sheets, which sits idly or is used to overpay for companies with strategic patents in bidding wars for tech dominance.

Given all of the above, it is not at all surprising that few technology stocks have traditionally paid dividends. After the burst of the dot-com bubble however, many tech companies have started to pay dividends to their investors, many of which are probably still sitting on large unrealized losses. Examples of that include Microsoft (MSFT), Qualcomm (QCOM) and Oracle (ORCL). Cisco Systems (CSCO) is the latest large-cap name in the technology sector to announce their intent to pay a dividend by July 2011. Typically, companies that initiate a dividend tend to perform well over the months after the first payment. For Cisco investors, this small dividend would provide some return on their investment, which has been mostly flat since 2002. Whether Cisco will be able to grow the dividend is yet to be seen however.

Other tech bellwethers such as Intel (INTC) however have been paying a dividend since 1992, and have been regularly increasing it with the exception of 2002 and 2003. The company has still managed to generate outstanding growth in revenues and earnings over the period it paid dividends. Intel Corporation designs, manufactures, and sells integrated circuits for computing and communications industries worldwide. The company yields 3.40%, trades at a P/E of 11.20 and has an adequately covered dividend.

Another tech stock paying dividends is big-blue. IBM (IBM) has paid a dividend ever since 1911. International Business Machines Corporation (IBM) develops and manufactures information technology (IT) products and services worldwide. The company yields 2%, trades at a P/E of 10.60 and has an adequately covered dividend. (analysis)

Microsoft (MSFT) initiated a dividend policy in 2003, and also paid a onetime special $3 dividend in 2004. The company started raising dividends almost immediately, although it hasn’t raised distributions since 2003. If the 4Q 2010 dividend payment is not increased, the company’s would lose on its 6 year streak of consecutive annual dividend increases, which would have placed it on track to achieve a dividend achiever status in three years. The stock yields 2.10% and has a P/E of 12 (analysis)

Most large cap tech stocks still seem to prefer stock buybacks to dividends. Intel (INTC) has shrunk the amount of shares outstanding from 6.73 billion in 2000 to 5.52 billion in 2009. IBM has shrunk the amount of shares outstanding from 1.75 billion in 2000 to 1.31 billion in 2009. Microsoft (MSFT) has reduced the amount of shares outstanding from 10.76 billion in 2001 to 8.76 billion in 2010. The issue with buybacks is that they generally tend to be initiated and maintained when companies are flush with cash and as a result of higher earnings stock prices are high. During recessions companies end up eliminating their stock buyback programs, in an effort to conserve cash. In retrospect the companies end up spending shareholders money at overvalued stock prices, and stopping their buyback programs when prices are low. Another reason for buybacks is that they tend to mask the dilution of shareholders by options exercised by management at favorable prices. In addition to that, if managers are evaluated on earnings per share, they would have a better incentive to retire as much stock as possible. This would help them to increase earnings per share, even if total earnings are flat.

For shareholders to receive a consistent return on investment and to unlock the value of the cash rich balance sheets of tech companies, they should demand dividends. Dividends would provide them with an annual return, which is less volatile and more stable that relying on price increases alone. In addition to that, this is would provide another incentive for shareholders to keep holding onto their shares, which have probably gone nowhere over the past decade.

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