Will other tech companies follow Microsoft and pay dividends?
By DAN REICHL
BLOOMBERG NEWS
Saturday, January 18, 2003
SAN FRANCISCO -- Microsoft Corp.'s decision to pay its first dividend may prompt other computer-related companies to change course and dip into their cash holdings to reward shareholders, investors said.
Cisco Systems Inc., Yahoo! Inc., Dell Computer Corp. and Oracle Corp. are among companies that may declare dividends after Thursday's announcement by the world's largest software maker, fund managers said. Microsoft, with $43 billion in cash and short-term investments, is in the best position among its peers to defy the computer industry's custom of not paying dividends in order to plow cash back into research and development or share buybacks.
"The company's generating cash at such a substantial rate that if Microsoft won't do it, you cannot expect others to follow," said Bob Rezaee, who helps manage $7 billion at Montgomery Asset Management. "It has to be a trendsetter."
Microsoft's announcement follows President Bush's proposal to eliminate the federal tax on dividends. If it is approved, companies with billions of dollars in cash may be pressured by investors to follow Microsoft's lead and share their wealth through dividends, investors said.
Microsoft said it will pay a dividend of 8 cents a share after a stock split. Microsoft also reduced its sales forecast for the fiscal year ending in June.
William Ramstad of Seattle, who owns 180 Microsoft shares, said the dividend disappoints him, because it's too small.
"It's trivial. It doesn't mean anything. Maybe it's a start, anyway," he said.
Ramstad said he owned 400 shares a few years ago but sold them because "it doesn't pay anything while you're waiting for something to happen."
Investors said the company's decision is an indication the software maker can't increase sales and profit as quickly as it has in the past. Microsoft reported average annual sales gains of 38 percent in the 1990s.
In the year ended June 30, sales rose 12 percent as new initiatives have failed to compensate for slowing sales of personal computer software.
"It's an acknowledgement they can't use their capital to grow," said Bill Schaff, chief investment officer at Bay Isle Financial Corp. "There's a lot of cash that accrues, and they can't do much with it, unless they want to keep buying stuff and losing money on it."
Bay Isle Financial, which oversees $1.2 billion, holds IBM shares and sold its Microsoft shares.
Microsoft Chief Financial Officer John Connors said this year's sales and profit will be tough to exceed in the company's fiscal year, which begins in July.
Computer and software companies have avoided offering dividends. The Nasdaq 100 Index, made up of the biggest Nasdaq stock market stocks outside the financial industry, returned a dividend yield of 0.11 percent in the past year.
Cisco, Oracle and Microsoft are among members of the index, which also includes Amgen Inc., the world's biggest biotechnology company.
By comparison, the Dow Jones industrial average, which comprises Coca-Cola Co., AT&T Corp. and 28 other stocks, provided investors with a dividend yield of 2.26 percent in the same period. Microsoft had been the only company in the Dow average that didn't pay a dividend.
"An investor might wonder why companies aren't paying a dividend now that the tax question is taken care of," said Brett Berry, who helps manage $1.2 billion at Bailard, Biehl & Kaiser. "It's a way of enticing a new type of investor into your stock."
Berry and Rezaee both suggested that Cisco might join Microsoft in declaring a dividend. The world's largest maker of equipment to link computers held $21.2 billion in cash and investments as of Oct. 26, according to the company's most recent quarterly report.
Cisco spokeswoman Terry Anderson repeated what the company said last week after Bush announced his plan and in November, when shareholders rejected a dividend proposal by 10 to 1.
"Our board continually evaluates the best way to return cash to our shareholders," Anderson said. "We're not religious when it comes to dividends."
Some companies have said they prefer to use their cash to buy stock. In August, Cisco said it boosted a share-buyback plan by $5 billion to a total of $8 billion. It has repurchased $3 billion of the shares since announcing the buyback in September 2001.
Microsoft previously had said it was using cash to buy its stock rather than issuing a dividend. The company also said it was conserving cash to pay for legal costs in its antitrust case, and Connors told investors on a conference call this week that it was possible the software maker would increase the dividend in the future as it clears up its legal troubles.
Oracle Chief Financial Officer Jeff Henley has said buying back stock was a more tax-efficient way for the company to increase shareholder value.
Other computer-related companies are leaving the door open. Internet-search service Yahoo! is considering a dividend, Chief Financial Officer Susan Decker said on Bloomberg Television. Dell Chief Executive Michael Dell has said the personal-computer maker, which reported $9.1 billion in cash and investments at the end of its fiscal third quarter, may consider a dividend plan.
Oracle spokeswoman Jennifer Glass said that the software maker hasn't announced plans for a dividend. Last week, Henley said the company would consider paying its first dividend if Bush's proposal were enacted. Oracle had $5.48 billion in cash, cash equivalents and short-term investments as of Nov. 30.
Companies in other industries may make a switch as well. WellPoint Health Networks Inc., California's biggest health insurer, said it had $6.16 billion in cash and investments as of Sept. 30, and it doesn't pay a dividend.
"If the current proposal on the taxation of dividends were to go through, it is fair to say we would take a closer look," WellPoint spokesman John Cygul said.
Amgen, which listed cash and marketable securities of $4.04 billion in its third-quarter earnings statement, will probably stick to buying back shares, spokesman Jeff Richardson said.
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