Commentary: So Much Cash, So Few Dividends

More than any other sector of Corporate America, many tech companies in Silicon Valley and elsewhere have historically shown little but scorn for the idea of paying dividends to shareholders. Given the boundless growth in technology--and the limited cash many startups have--most argue they are better off pouring their cash into research and development or other investments while also retaining a cushion for the sector's notoriously sharp downturns.

Yet what has been true for many of tech's fast-growing small companies may no longer apply to the giants. Indeed, take a look at the biggest tech companies, most of which trade on the growth- oriented NASDAQ: They tend to generate far more cash than they can use. Seven of the largest, including Microsoft Corp. (MSFT ) and Cisco Systems Inc. (CSCO ), are sitting on $100 billion in cash and liquid investments, yet most pay no dividends.

But if the Administration succeeds with its proposal to repeal the tax on dividends and on some retained earnings, many tech outfits will have to think seriously about paying out more to lure back burned investors. "I think investors will push for reduction of the excess cash balances in tech companies," acknowledges Alfred J. Castino, chief financial officer at Autodesk Inc., a San Rafael (Calif.) maker of engineering software that has been paying dividends since 1989.

Already, a few cash-rich companies are opening the door. On Jan. 7, Chief Financial Officer Jeffrey O. Henley of Oracle Corp. (ORCL ) told analysts that enactment of the new proposals would make it "quite likely we will have to reconsider our policy." But privately, many execs fret that competitive pressures to pay dividends could siphon money that would otherwise go into capital spending. And they believe reinvesting in their core business is the best use of spare cash. "We think there are more attractive growth opportunities for us," says Daniel J. Warmenhoven, CEO of Network Appliance Inc. in Sunnyvale, Calif.

But the prospect of making sound investments isn't the only reason tech CFOs like those big stockpiles of cash. Many companies use spare money for stock buybacks, which, by reducing shares outstanding, can conceal the true cost of lavish stock options. "Tech investors might start questioning the options programs if companies can't buy back enough stock to offset the dilution," notes Leh-man Brothers Inc. accounting analyst Robert Willens.

As the tech industry matures, though, hanging on to a big cash hoard could become harder to justify. The heady 12%-plus growth rates enjoyed by the sector in the late 1990s are likely to slow to a more modest 7% to 10%. And while there will always be a new generation of startups that will be better off reinvesting profits, established companies such as Microsoft, Cisco, and Oracle have little reason for not paying dividends.

Increasingly, investors are making it clear they want those dividends. UBS Warburg (UBS ) analyst Nikos Theodosopoulos notes that when Cisco informally polled more than 500 institutional investors at a conference in November, the majority said they would like a dividend if laws changed.

Replacing the buyback culture with one favoring dividends could also inject some much-needed discipline into companies such as Microsoft and Intel Corp. (INTC ), which have frittered away billions in excess profits on poor investments such as Microsoft's $5 billion stake in AT&T (T ). "Their returns are actually being dragged down by how much cash they have, because it's causing them to make poor investments," argues Robert Schwartz, an analyst at Thomas Weisel Partners LLC.

For all their dividend foot-dragging, many tech magnates would make out nicely, since they tend to own more of their company's stock than Old Economy CEOs. For every penny per share that Oracle paid out in quarterly dividends, for instance, CEO Lawrence J. Ellison would generate $56 million annually in tax-free income. Figures like that may help convince tech leaders the time has come to start paying out dividends.

By Dean Foust

With Robert D. Hof and Peter Burrows in San Mateo, Calif.

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