Tech Companies See Bush Plan On Dividends as Troublesome
By Jonathan Krim
Washington Post Staff Writer
Wednesday, January 8, 2003; Page E01
President Bush's proposal to eliminate taxes on stock dividends is an unwelcome bucket of worms for many major technology companies, which have long resisted using their cash for dividends and don't consider the plan the best way to jump-start the battered tech and telecommunications sectors.
In public yesterday, many companies and their trade associations put on a supportive mask, commending the president's offering as one that could help the economy generally.
"We think these proposals will be good for the overall economy by encouraging consumer spending and investment," said Rick White, chief executive of TechNet, a major Silicon Valley lobbying group that counts players such as Microsoft Corp., Intel Corp. and Dell Computer Corp. among its members.
Privately, however, several industry lobbyists in Washington vowed a congressional fight. They say the measure offers little to stimulate corporate technology spending that is essential for the industry to pull itself out of a deep swoon that is in its third year.
"This is not the bill that's going to pass Congress, and everybody knows it," said one lobbyist, who said his organization tried to convince the White House that there are far better ways to use $370 billion in tax breaks dedicated to dividend tax cuts over the next decade.
To many technology companies, offering a dividend -- which gives investors a modest payment per share of stock owned -- is an anathema, something best suited for mature, slow-growth industries. Instead, they have preferred to use the cash to invest in their businesses, make acquisitions or buy back their own stock.
"It's classic old-economy versus new-economy" thinking, said another lobbyist. "They are the most old-economy administration since Bush One."
Bruce P. Mehlman, assistant secretary for technology policy at the Commerce Department, disagreed.
"Tech companies need customers to spend, investors to return to the markets, and employers to hire," he said. "They have told us their top priority is overall economic growth, and as the president's plan accelerates our recovery, that will greatly benefit the beleaguered sector."
Tech companies had hoped Bush would further accelerate the rate at which companies could depreciate technology equipment, providing businesses a tax incentive to buy more hardware. The economic stimulus package passed by Congress last spring provided a depreciation increase for all corporate purchases, but tech companies argue that more is needed. The current Bush plan allows only small businesses to write off as expenses a maximum $75,000 in equipment purchases, up from $25,000.
Technology firms that do extensive business overseas also had pushed for a one-year reduction in the amount of taxes they pay if they bring back to the United States money earned elsewhere. Currently, those overseas earnings are taxed at the U.S. rate of 35 percent; tech firms had hoped to temporarily slash it to 5.25 percent. Several big companies, such as chip maker Intel, are earning as much as 70 percent of their income overseas.
The companies also worry that they will now feel pressure to issue dividends to make their stocks more attractive to investors. During the go-go stock market of the 1990s, tech stocks were rising so quickly that stocks of slower-growing companies that paid dividends fell out of favor. After the bubble burst, many investors returned to the safer haven of dividend-paying stocks, which would be even more attractive if the Bush plan becomes law.
"They knew what we wanted, and they went another route," said one tech lobbyist. "But it's Day One of this process, and things will change along the way."
Companies such as Microsoft, which has roughly $40 billion in cash, and Cisco Systems Inc., which has about $7 billion, have been under fire for not returning to shareholders some of that money in the form of dividends. Especially as tech stocks have cratered since early 2000, many shareholder advocacy groups have argued that investors who have held on should at least be rewarded with dividends from companies with the free cash to pay them.
A Microsoft spokesman declined to comment on the Bush plan or on the company's dividend policy.
Cisco spokeswoman Penny Bruce said the company's board continually evaluates the best way to reward shareholders. But while careful not to criticize the Bush plan, she said the manufacturer of networking equipment continues to believe that buying back company stock and reinvesting other cash in the business is better for shareholders than paying a dividend. Cisco has bought $3 billion of its own stock since October 2001 and is committed to purchasing another $8 billion worth of shares by September, Bruce said.
Perhaps the greatest fear of tech companies, analysts say, is being lumped in with stodgy, slow- or no-growth companies that traditionally pay dividends, such as electric utilities and the telephone companies. Many of these firms offer dividends of between 2 and 5 percent of share value.
"For the tech industry, issuing dividends is a very dangerous issue," said Bill Whyman, head the Precursor Group, an independent investment research organization. "They can't talk about dividends without at the same time acknowledging that they are becoming mature industries that can't use all the cash themselves."
Nevertheless, the chief financial officers of two large companies, radio giant ClearChannel Communications Inc. and database vendor Oracle Corp., said yesterday that they would consider issuing dividends if the proposal passes.
A handful of large technology companies, including Intel, International Business Machines Corp. and Hewlett-Packard Co., offer modest dividends.
Intel spokesman Chuck Mulloy said the company added a dividend years ago because many mutual funds would not purchase shares of stocks that didn't offer them.
Another firm that pays a dividend is Helix Technology Corp., a small Massachusetts firm that makes semiconductor cleaning equipment. It has issued dividends for more than a decade.
"We tend to look at our shareholders as partners," said Jay Zager, the company's chief financial officer. "When we have cash in excess of our business needs, it's something we believe we should share."
Staff writer Jonathan Weisman contributed to this report.
© 2003 The Washington Post Company
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