A Moody’s report shows that while cash-rich tech companies are increasing dividends, payout ratios remain low.
Cash-rich tech companies are expected to increase their dividends in 2011, but compared to what they usually pay, it’s still quite low and mostly unchanged. But it’s not because they’re greedy, it’s just the nature of the tech sector.
According to a report from Moody’s Investor Service, tech companies typically pay about 20 percent of discretionary cash flow (vs. 40 percent in the broader market, see chart below). The reasons for keeping dividends at that level were due to “constraints on liquidity, operational requirements, and company-specific strategic considerations,” Moody’s said.
As far as liquidity, with many tech companies holding as much as 90 percent of their cash overseas (as in the case of Cisco), there is much room for maneuvering. Using overseas cash can trigger a big tax hit for a company. In terms of operations, with shorter product development cycles, R&D is usually high. Also, as Moody’s points out, companies can find that a product is flawed. This was the case for Intel (which had boosted its dividend in 2010). The company discovered a design flaw in a chipset related to its new Sandy Bridge microprocessor. Repair and replacement estimates are $700mn, with an additional hit in deferred revenue.
Most companies (65 percent) in The NeuGroup’s Tech20 Treasurers’ Peer Group (a mix of techs) do not pay a dividend and are not planning to any time soon. Overall, at least two-thirds of all companies that pay dividends will increase them this year, according to the Wall Street Journal. This is because cash piles are rising but places to invest that money are limited (see related story here).
