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Technology Stocks : LSI Corporation
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To: sea_biscuit who wrote (18936)6/19/1999 3:41:00 AM
From: shane forbes  Read Replies (1) of 25814
 
Dipy:

A company's growth rate is
(retention percent) * (beginning-of-year Return of Equity).

When companies retain 100% they can sustain much larger than
average sustainable growth going forward. When they pay say 40% of
income in growth they give up 40% of their potential sustainable growth rate. If they want to grow at the same pace as another comparable company they have to take on debt. Not good.

With established companies in 'mature' industries there is no problem in paying a dividend. But in many cases in industries like high-tech it is better to reinvest since you have a better opportunity for growth by doing so. In high tech it is difficult to generate sales growth because of the competition. So they reinvest totally else they'd have to go further and further into debt.

Besides I would argue that stock buybacks are more in vogue now and these do take place during market collapses. Even if there is a bear market no one will be clamoring for LSI to start paying out a dividend! Besides stock buybacks give the company more flexibility as well. And these days more flexibility is good - of course there is no free lunch and the salad (the 'certainty' of dividends) is out the window with stock buybacks. Recall the IBM buyback announcement which stopped a market plunge cold? There was another one from one of the big boys as well in recent months.

Also though dividends stop 'falls' I suspect they also slow 'rises'. The dividend return part of the 'total return' formula implies that the cap. appreciation part of the formula is not as robust. (Preliminary observation)

Besides many high techs (LSI included) are fighting for survival day in and day out and do not have the luxury of a 'steady-state' company like Exxon (which has been around for several decades) with steady sustainable Free Cash Flow streams way out in the future. Sure Exxon will see the occassional hiccup but they have a much higher earnings predictability than most high-techs. In turn this means that the high techs will not be too eager to pay out dividends as they may be starving for cash at sometime in the near future if things do not go their way.

So it is all about comparing apples and apples. Companies like CSCO and MSFT don't need to pay a dividend to keep their shareholders happy.
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