Is This New Tech Dividend a Waste of Money?


Look what formerly cash-holding tech company is going to be paying its first dividends: PC giant Dell (NAS: DELL) . The company has seen declines in its revenues, profit, and stock price of late. To remedy its operational decline, it's started to open its wallet for acquisitions to help transform it into more of a business service and solutions provider. Meanwhile, its just-announced first dividend is obviously a play at taking care of its recent share-price erosion. In my opinion, that isn't the best solution to the problem.

Slowly discovering generosity
Dividend payouts are a trend that's stealthily crept into the tech sector. Sure, there had always been the stray company here or there that paid out a few cents to shareholders, but for the most part this wasn't (and still isn't) the norm in the industry. IT is a business that's heavy on capital investment, particularly in terms of research and development. Tech companies are expected to plow their earnings into discovering new, innovative, and hopefully lucrative products and services.

One of the biggest dividend debuts in recent times belonged to Microsoft (NAS: MSFT) . After years of accumulating billions of dollars in cash and doing nothing particularly interesting with the money, the company assented to shareholder demand. At first, its dividend was minimal ($0.08 annually), but it soon grew to levels more in line with those typical of non-tech blue chips. At the moment, the company's dividend stands at $0.80 per year, for a yield of 2.7%.

Ever since, IT companies have been more willing to return some of their profits to shareholders. A little more than a year ago, networking big guy Cisco (NAS: CSCO) broke its long-standing tradition of not paying dividends. It did so rather cautiously, introducing a $0.24-per-share annualized payout, which, four quarters later, was raised to $0.32. Right now that means the stock's dividend yield is a comparatively low 1.9%.

The most famous recent example of a formerly tight-fisted tech giant rediscovering its wallet is tech darling of the age Apple (NAS: AAPL) . Although it paid dividends once upon a time, that era ended in the mid-1990s. But the company's resurgence earlier this century saw it accumulate big piles of cash and short-term investments over the years -- to the tune of more than $28.5 billion in its most recent quarter, against a debt level of precisely $0. Its $2.65-per-share quarterly disbursement seems generous at first glance; keep in mind, though, that this stock currently trades in the sub-$600 range.

Married to their dividends
Of course, there are storied tech companies that have been doing the Dividend Shuffle for a lot longer and with more consistency than those enterprises. Exhibit A is king chipmaker Intel (NAS: INTC) , which manages to grow sales and keep margins fat and steady while paying a dividend that's grown incrementally over time. The company is relatively generous with its payout, which, at an annual rate of $0.84 per share, makes for a healthy 3.2% yield.

The early 1990s saw the dawn of dividend payments for Hewlett-Packard, and the company's been shelling out disbursements ever since. These increased very gradually over time, from the initial 2.5 cents to the most recent 13.2 cents (nearly $0.53 on a yearly basis). That makes for a not-bad yield of 2.5%, but the company's results have been weak of late, and its long-term debt load is more than triple its cash position. So it's questionable whether that payout is sustainable.

Money in the bank
Sustainability won't be an immediate problem for Dell. Although like HP it's been hit with adverse market conditions and is struggling to reinvent itself somewhat, it has plenty of money and relatively little debt dragging it down -- cash and short-term investments stood at $13.7 billion in its most recent quarter, while debt was about $9 billion.

That cash pillow provides the company with the monies for its current spending spree, as it tries to buy its transformation into Dell 2.0 through acquisitions. Just this year, the company shelled out the bucks to buy Wyse, a specialist maker of so-called "thin-client" systems, and security solutions provider SonicWall, among several others.

These are sensible moves that investors can hope will provide much-needed growth down the road. More of a concern is whether that new dividend payout will be money well spent and support the stock price. Recent history with other big techs suggests not. Cisco's stock saw a bit of a pop after its dividend announcement was made, but then it slouched noticeably over the subsequent six months. And at the moment, the stock is about $0.35 below its level on the day the announcement was made.

Similarly, Microsoft's stock price hasn't gone anywhere spectacular in the nearly 10 years since it entered the dividend club. Before the announcement that the company would start paying out, its shares traded at the equivalent (adjusted for a stock split) of $27.68. The price these days? Barely a buck fifty higher. Meanwhile, its dividend payouts have amounted to more than $7 per share over that period. The company still has money to burn, but this sort of campfire hasn't ignited its stock.

Show me the growth!
Investors are a picky bunch, and while they like payouts, they prefer them to be accompanied by improved fundamentals. Companies such as Cisco, for one, haven't really delivered this, at least to any meaningful extent. So their share prices have generally languished in spite of the disbursements. Expect this to happen to Dell, too, at least until it completes its transformation and boosts its results substantially. That's what investors are really hungry for, after all.

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At the time thisarticle was published Fool contributorEric Volkmanowns no stocks mentioned in the story above. The Motley Fool owns shares of Cisco Systems, Microsoft, Apple, and Intel.Motley Fool newsletter serviceshave recommended buying shares of Microsoft, Intel, and Apple and creating bull call spread positions in Apple and Microsoft. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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Originally published