Absolve These Cash-Rich "Dividend Sinners"
Here we go again -- I just spotted another article exhorting non-dividend-paying companies with piles of cash to start paying dividends, calling them "Dividend Sinners." Sigh. Sure, some companies are indeed sitting on gobs of greenbacks. But for many of them, paying a dividend right now isn't the best idea.
Classic dividend payers are relatively stable, with rather consistent and predictable earnings. Consider National Grid (NYS: NGG) , for example. It's a regulated utility company, and in some areas where it operates, it's a monopoly. Its revenue has been growing by an annual average of 7% over the past five years. Unlike rapidly expanding businesses such as Netflix, which has been adding millions of new customers in recent years, millions of new electricity users don't just materialize from year to year, and people don't suddenly spend twice as much on electricity.
One alleged "Dividend Sinner" is Flextronics (NAS: FLEX) , a $4 billion contract manufacturer. Take a look at its 10-year net-income history, and you'll see five years in the red. If the company were to commit to paying out a certain significant sum each quarter, it might run into trouble. Recently, its profit margins have been pinched by slowing PC sales and falling mobile-phone prices.
Still, all is not lost for Flextronics. Over time, it can grow into a bigger company with more stable earnings, and at some point it might feel comfortable committing to a dividend payout. Plenty of other high-tech companies have done just that -- such as Cisco Systems (NAS: CSCO) , which recently sported a 1.6% yield.
But like Flextronics, Cisco is a cyclical business, with its intake influenced by the economic environment. That can be challenging for dividend payers. With more than $40 billion in cash and short-term investments, and only about $16 billion in long-term debt, Cisco can weather a lot of volatility, such as customers who have been putting off purchases in the recent recession. But Flextronics is not there yet, having more long-term debt than cash.
A big factor to consider when mulling over the dividend question is what else a cash-rich company can do with its money, other than pay out dividends. Sure, if a company pays out a dollar to you, you get a dollar, and that's nice. But many companies can put that dollar to good use, earning you more as a shareholder than if it paid it out in cash.
Amgen (NAS: AMGN) , for example, is another alleged Sinner, but as fellow Fool Jim Royal discovered earlier this year, its return on invested capital (ROIC) tops 20% and has been rising in recent years. That suggests that the company is getting a lot of bang from its bucks, and giving some of that up for a dividend might not be the best use of its money.
Warren Buffett's Berkshire Hathaway (NYS: BRK.B) has been criticized for many years for not paying a dividend, as it has long had tens of billions of available dollars in its coffers. Consider, though, that in 2009, he bought an entire railroad, Burlington National, in a $44 billion deal. In 2010, Burlington earned $2.5 billion, up almost 50% over the previous year. In his 2010 letter to shareholders, Buffett noted: "It now appears that owning this railroad will increase Berkshire's 'normal' earning power by nearly 40% pre-tax and by well over 30% after-tax. ... [It's] working out even better than I expected."
Buffett has said that he'll pay a dividend when he doesn't think he can do any better with his shareholders' money, but he's still finding some big deals. Shareholders are eager to see what he buys next, and speculation always abounds. My colleague Ilan Moscovitz, for example, dug up a handful of companies that seem to offer what Buffett is looking for. If Buffett were to consider acquiring mining concern Southern Copper (NAS: SCCO) , it would probably consume a lot of cash, as it's a $25 billion market-cap company. As Buffett prefers, it's in a business that's relatively easy to understand, and it has generous, consistent earnings. Indeed, it offers a dividend yield north of 7%!
Don't be so quick to scorn a company that pays no dividend. Ask yourself why, and remember that lots of powerful performers currently pay no dividend. It's true that a dividend can really turbocharge a portfolio, but each of your holdings needn't pay one.
At the time this article was published Longtime Fool contributorSelena Maranjianowns shares of Netflix, Berkshire Hathaway, Amgen, and National Grid, but she holds no other position in any company mentioned. Check out herholdings and a short bio. The Motley Fool owns shares of Berkshire Hathaway and Cisco and has created a bull call spread position on Cisco.Motley Fool newsletter serviceshave recommended buying shares of Netflix, National Grid, Cisco, and Berkshire Hathaway, as well as buying puts in Netflix. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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