Microsoft: Even Microsoft now yields more than Uncle Sam. Not long ago, tech investors didn’t expect, or want, payouts. Now, Microsoft is raising its yield to a tidy 2.6 per cent, more than 10-year Treasuries, and Cisco is paying its first dividend. With growth slowing, shareholders need better rewards for the industry’s risks.
Cash can more easily be hoarded when big opportunities for more sales exist. Amazon’s return on invested capital, for example, has averaged around 50 per cent a year over the past several years. So it makes sense to plow money into the business.
Yet even fast growing companies, such as Apple and Google, can have too much. Combined, the two tech leaders have about $75 billion in net cash and investments on their balance sheets - and are steadily adding to those stockpiles. If this booty cannot be wisely reinvested in the business, the risk is it will be squandered on overpriced acquisitions.
The reality is more complex for most software and gadget companies. They have plenty of cash but can’t realistically promise growth. Understandably, investors increasingly wonder why they should park their money in these stocks, risking their principal instead of looking elsewhere. Long bond buyers may suffer more from inflation, but don’t have to worry about technological obsolescence. Microsoft’s dominant cash cow, for example, could eventually be gutted by Google or Apple. A dividend helps compensate for this risk.
So the herd has slowly moved toward the dividend pasture. Seven of the top 10 biggest tech companies now pay a quarterly stipend to shareholders. This increases pressure on the holdouts to initiate and for those paying one to increase it. All things being equal, investors should prefer companies that offer better rewards. And there’s plenty of open space to raise payouts. The tech yield, weighted by market capitalization, is just over one per cent. The S&P 500 offers almost twice as much.