Technology Stocks With Record Dividends Send Bearish Signal

U.S. technology companies have pushed their dividends to the highest level on record, a signal to investors that profit growth in the industry is slowing. 

Computer and software makers, the biggest contributors to this year’s 14 percent rally in the Standard & Poor’s 500 Index, will pay out $45.10 in total dividends per share in the next 12 months, according to data compiled by Bloomberg. Technology companies that started or raised dividends in 2012 have climbed 1.3 percent on average since the announcement, compared with gains of 15 percent for those that didn’t increase payouts.

While bulls say bigger dividends are a sign of confidence after 11 straight quarters of rising earnings in the industry left companies with ample funds to compensate shareholders, bears say boosting payouts shows chief executive officers are running out of ways to use their cash. Microsoft Corp. (MSFT), which started returning cash to shareholders in March 2003, has increased 31 percent since then, compared with 73 percent for the S&P 500.

“The signal that they are sending to the shareholders is, ‘look, growth prospects just aren’t there,’” Malcolm Polley, who manages $1.1 billion as chief investment officer at Stewart Capital in Indiana, Pennsylvania, said by phone Sept. 5. “Those companies that are paying dividends and increasing dividends, they used to be businesses that were fast growing, they needed every dime of cash flow to reinvest in the business, but these are by and large very mature businesses now.”

Central Banks

The S&P 500 rallied to the highest level since 2008 last week, climbing 2.2 percent to 1,437.92 after the European Central Bank said it would buy bonds to ease the sovereign debt crisis. Technology shares rose 2.1 percent, extending their 2012 gain to 22 percent, the most of the 10 industries in the S&P 500. (SPX) Futures on the S&P 500 declined 0.2 percent at 8:27 a.m. in London today.

Apple Inc., Dell Inc. (DELL) and SAIC Inc. (SAI) are among the 13 companies in the S&P 500 that have initiated a quarterly payout this year, according to data from S&P. Dell dropped (DELL) 11 percent and SAIC slumped 6.9 percent since announcing the decision, while Apple is up 13 percent.

Technology companies still have the lowest dividends among S&P 500 groups, at 1.1 percent of share prices, data compiled by Bloomberg show. The S&P 500 yields 2.1 percent.

Intel Forecasts

Intel, which cut its third-quarter sales forecast last week on falling demand for personal computers, has increased its dividend three times in the past 18 months. The world’s largest semiconductor maker, based in Santa Clara, California, has raised the award to 22.5 cents a share in May and the shares have retreated 13 percent since then.

Dell said in June that it would start to pay dividends (DELL) and has reported three consecutive quarters of declining earnings.

While investors expect utilities, phone companies and pharmaceutical makers to pay dividends, the technology industry has traditionally been different, using excess cash to fund research, development and acquisitions that would drive up profits faster than in more mature sectors of the economy.

Telecommunication stocks pay the most, with a yield of 4.5 percent, and utilities are the next-highest at 4 percent. Five of the eight S&P 500 phone stocks pay a dividend, with Windstream Corp. (WIN), based in Little Rock, Arkansas, yielding 9.9 percent.

‘Solid Companies’

“If we’re talking about growth technology stocks, paying out a dividend probably isn’t a good thing,” Timothy Ghriskey, the chief investment officer at Solaris Group LLC, which manages about $2 billion, said in a phone interview from Bedford Hills, New York. Now, they are “good companies, solid companies, but they don’t have the same growth profile generally as a non- dividend payer,” he said.

Earnings growth among computer companies is forecast to slow for the next two years. Profits may increase 18 percent in 2012, 14 percent in 2013 and 12 percent in 2014, according to about 1,600 analysts’ estimates compiled by Bloomberg.

New dividends have historically preceded weaker stock performance. In the last decade, computer companies that started the programs rose 2.2 percent on average in the three months after the announcement, Bloomberg data show. That compares with an average 5.7 percent three-month gain for stocks in the industry that haven’t made a payout.

(from: http://www.businessweek.com/news/2012-09-09/tech-stocks-with-record-dividends-send-bear-signal-for-investors)