by Marc Bastow | August 22, 2012 6:00 am
I have to hand it to IPO Playbook editor Tom Taulli: Last week’s announcement by Cisco (NASDAQ:CSCO) that it would give investors a nice 75% dividend pop for hanging around truly is a sign of the times. Cisco’s market is maturing rapidly, the competition from Hewlett-Packard (NYSE:HPQ), Juniper Networks (NYSE:JNPR) and others is cutting into margins, and growth has stalled quite a bit.
Which got me to thinking about other members of the tech world in the same boat: slower growth prospects, dragging margins bringing down, lagging stock prices … and naturally, I think about the size of their dividend, and their willingness to give it some oomph.
The dividend side of the equation is critical to investors looking to find steady sources of income. While traditionally filled out by old-school companies like Exxon Mobil (NYSE:XOM) and Johnson & Johnson (NYSE:JNJ), the ranks of “income stocks” eventually will be joined by more tech names.
Tech stocks used to hoard cash (they still do to a great extent) and plow any excess into R&D, but that is starting to change as certain industries and companies mature. Indeed, according to Paul Lim in the New York Times, tech companies now account for 13.8% of all S&P 500 payouts — up from 6% in 2007 — and S&P Dow Indexes’ Howard Silverblatt says all it would take for tech stocks to lead the dividend pack would only require Google (NASDAQ:GOOG) to shell out a modest dividend.
Just as Cisco is putting itself in “mature” market status, the same can be said for Microsoft (NASDAQ:MSFT), Intel (NASDAQ:INTC) and Oracle (NASDAQ:ORCL). This doesn’t mean they won’t continue to grow — it just means they won’t necessarily provide the torrid growth experienced in the 1990s and early 2000s.
I also happen to think Apple (NASDAQ:AAPL) will one day fill the bill in that category as a mature company, but it’s such a growth monster today that we needn’t consider it right now.
Why do I think at least three these guys will become the next generation’s Exxon and J&J? Let’s take a look at some of the numbers, in comparison with Cisco.
|5-Year Revenue Growth||24%||34%||40%||65%|
|5-Year EPS Growth||(12%)||64%||85%||80%|
|5-Year Stock Growth||(37%)||9%||11%||66%|
|Dividend Start Date||2011||2003||1992||2009|
|Dividend Payout Ratio||10%||38%||32%||13%|
Despite what looks like some very nice growth rates at Microsoft, Intel and Oracle, these tech companies definitely qualify as “mature,” and the dividends paid out by these guys will be an important measure for investors.
Truthfully, I’m not sure why investors have punished Microsoft and Intel so much over the years, but both companies clearly got the message by bolstering dividends. Of course, while dividend ratios are above the S&P 500 average of 30%, they still have room — and time — to keep increasing those payouts. Just like Exxon and J&J.
As for Oracle — yes, it has a sub-1% dividend right now. But so long as it can ring up a 66% stock appreciation over any 5-year period, Larry Ellison doesn’t have to apologize to anyone for meager dividends. And when that growth runs out, ORCL can start bumping up its dividend — even to the point of Cisco’s dramatic increase — without making much of a dent in the company’s coffers.
Long term, of course, is where the traditional dividend investors look, and let’s not kid ourselves: Technology is a hard place to look long term. All four of our players — Intel (chips), Cisco (routers), Oracle (database management) and Microsoft (enterprise software) — own significant long-term advantages in their respective markets, and for the most part, each either helped define or monopolized their market.
Can those advantages change? Of course; bad management decisions always lurk around the corner, and companies can miss future trends (witness Microsoft’s whiff on mobile and search engine platforms). Hard as it is to imagine, even Apple might one day find itself behind a curve.
But these companies have the cash, the products and the brainpower to maneuver for the long term, much like the Johnson & Johnsons and Exxons of the world before them.
So while we might lament these companies’ occasionally lagging stock prices, investors looking for security far down the road shouldn’t have much of a gripe.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing he is long AAPL, MSFT and INTC.
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