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


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.