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When will large cap tech stocks start paying dividends?

Last week, I spoke about the tech sector to BNN’s Howard Green with Rob Cox of Reuters who had broken a story on Cisco’s restructuring. Cisco has gone nowhere since crashing after the tech bubble broke over ten years go. It’s stock trades today where it traded in 1998.

CSCO 2011-04-14

We have since heard a lot about CSCO’s restructuring including its surprising decision to drop the widely-acclaimed Flip camera as it restructures its consumer business to focus on its core competencies in routers. Tech Crunch asked the very important question of what this means about startup success and postulate the following:

The best acquisitions seem to be those where the acquired company is left alone. But it is easier to adapt to a changing market if you are a standalone startup than if you are part of a larger company. Could Flip have survived on its own? And what would it be worth today if it hadn’t sold?

-Could Flip Have Survived On Its Own? (TCTV)

My question when talking to Rob and Howard went more to why investors allow these tech giants to get away with such low dividend payouts when it is clear they have limited growth prospects. Ever since the tech bubble, technology stocks have traded at a premium to the market as investors chased growth over value. The reality is that growth has never outperformed value over the long-term. The gains are illusory as we see with Cisco.

Here is another example in Microsoft.

The PC market is showing signs of having passed its peak. Weak demand by consumers for PCs, coupled with a switch to tablets such as Apple’s iPad, meant that worldwide PC shipments fell compared with the same period in 2010, according to two leading research groups.

According to the research group Gartner, PC shipments were just 84.3m units in the first quarter of 2011 – a 1.1% year-on-year decline (from 85.1m units) which was especially marked in the US, where it fell by 6.1%.

Another research group, IDC, which uses slightly different methodologies, said that global shipments were 80.56m, a year-on-year fall of 3.2% from 83.2m in the first quarter of 2010, and down more than 10% in the US.

That will have had a knock-on effect on Microsoft’s quarterly results, due to be announced on 28 April.

-PC sales ‘have passed peak’ – The Guardian

Yet Microsoft pours money into gaming and acquisitions. Just a few years ago, Microsoft was chasing acquisitions like Yahoo! What if MSFT had gotten YHOO – would they have turned the company around?

Like Cisco, Microsoft’s growth has stagnated and its stock has gone nowhere for over a decade.

MSFT 2011-04-14

I would argue that this is evidence that these companies are wasting shareholder capital by plunking down for splashy acquisitions and large new capital investments that are not paying off. Cisco and Microsoft have huge cash balances waiting to be deployed. This money can go to buying back shares at inflated prices or making acquisitions of dubious value to shareholders. The right thing for these companies to do is not necessarily just restructure but change their mindset and accept that the glory days of top line growth are over. First and foremost this means increasing the dividend payout to match other sectors of the economy.

With Google and Apple also reaching that critical mass where growth becomes illusive, these companies have also started to amass huge war chests to splurge on acquisitions. Is this the right strategy, knowing that paying dividends signals lower growth prospects, and therefore, a lower P/E ratio? Or should investors be concerned that Apple and Google too will begin to destroy value the way Microsoft and Cisco have?

Video below. (click on picture for link)

BNN 2011-04-05 2

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

4 Comments

  1. As always, an interesting post. As distinct from Wall Street these are businesses that actually make things in the real world and make things work better. As such for investment opportunities they have to look at future demand pull. Posit for a moment that the economy is a system to support the distribution of goods and services on a flow of money rather than an extractive resource from which the powerful draw money. The thought suggests itself that allowing for thirty years the powerful to treat it in the latter form has undermined its’ ability to function in the former.

    It seem like the time has never been riper for shareholder revolt: management pay and the incentives it creates have left shareholders in the same cold pasture as workers and consumers in general, cut off from any of the profits that accrue to the business. As owners perhaps shareholders, if rilled enough, will figure our how to pry some profits back out of the executive suite.

    • You have a real agency problem in big corporations. The managers are incented to grow their corporate empire while shareholders just want greater returns. So when a company reaches a certain size, it becomes harder and harder to maintain growth rates. That comes into direct conflict with the managers’ desire to increase their fiefdom. So usually, they go down the road of buying back stock and making dodgy acquisitions, wasting shareholder money.

      The reason dividends exist is to prevent this kind of wastefulness. They are a check on the corporate managers. And it is only because shareholders lack real power in changing executive decision making that we have not seen more of a return to dividend-based investing.

      • Your reply suggests you might share my view that a return to the pre Greenspan/Friedman view of anti-turst, as a brake on industry consolidation then rather than as the Greenspan/Fridmanite grease of sectoral “efficiency”, might provide a boon to real investment (by which I mean investment as Levy and Kalecki defined it, contra the three card monte that passes for investment in our current financial markets). When Standard Oil was dismantled, and again with AT&T, shareholders were the biggest winners as the fragmented components of the former monopolies turned out to be more valuable than their parent. Have you seen Barry Lynn’s “Cornered”? If not it is worth picking up.

        • The AT&T T-Mobile merger will be a good test. I use T-Mobile and am very happy with it. I used to use AT&T and didn’t think they were as good. This merger would be anti competitive and a bad deal for T-Mobile customers. Let’s see whether it is blocked.

  2. As always, an interesting post. As distinct from Wall Street these are businesses that actually make things in the real world and make things work better. As such for investment opportunities they have to look at future demand pull. Posit for a moment that the economy is a system to support the distribution of goods and services on a flow of money rather than an extractive resource from which the powerful draw money. The thought suggests itself that allowing for thirty years the powerful to treat it in the latter form has undermined its’ ability to function in the former. This now manifests itself in the form of no perceptible future demand for real investment to prepare for and exploit. Stock buy backs are just another executive straw into the existing tank of stockholder money before the lack of future demand manifests itself as capital liquidation first in declining stocks and then in the liquidation of capacity.

    It seem like the time has never been riper for shareholder revolt: management pay and the incentives it creates have left shareholders in the same cold pasture as workers and consumers in general, cut off from any of the profits that accrue to the business. As owners perhaps shareholders, if rilled enough, will figure our how to pry some profits back out of the executive suite.

    • You have a real agency problem in big corporations. The managers are incented to grow their corporate empire while shareholders just want greater returns. So when a company reaches a certain size, it becomes harder and harder to maintain growth rates. That comes into direct conflict with the managers’ desire to increase their fiefdom. So usually, they go down the road of buying back stock and making dodgy acquisitions, wasting shareholder money.

      The reason dividends exist is to prevent this kind of wastefulness. They are a check on the corporate managers. And it is only because shareholders lack real power in changing executive decision making that we have not seen more of a return to dividend-based investing.

      • Your reply suggests you might share my view that a return to the pre Greenspan/Friedman view of anti-turst, as a brake on industry consolidation then rather than as the Greenspan/Fridmanite grease of sectoral “efficiency”, might provide a boon to real investment (by which I mean investment as Levy and Kalecki defined it, contra the three card monte that passes for investment in our current financial markets). When Standard Oil was dismantled, and again with AT&T, shareholders were the biggest winners as the fragmented components of the former monopolies turned out to be more valuable than their parent. Have you seen Barry Lynn’s “Cornered”? If not it is worth picking up.

        • The AT&T T-Mobile merger will be a good test. I use T-Mobile and am very happy with it. I used to use AT&T and didn’t think they were as good. This merger would be anti competitive and a bad deal for T-Mobile customers. Let’s see whether it is blocked.