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Don’t Hold Your Breath for Dividends From These Tech Giants

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Tech companies are sitting on piles of cash that would make Scrooge McDuck from DuckTales envious. But they aren’t putting it to work to hire workers, buy equipment, or pay shareholders. Isn’t it their responsibility to do something with the cash?

One explanation is that companies like Microsoft (Nasdaq: MSFT  ) , Apple (Nasdaq: AAPL  ) , and Cisco (Nasdaq: CSCO  ) are holding most of their cash overseas. At the end of the first quarter, these companies had $42 billion, $40.2 billion, and $38.8 billion in foreign cash on hand respectively. Bringing that home would create a big tax hit.

But there’s another factor that will keep these companies from paying investors back, at least in the form of dividends, anytime soon: stock options.

The real way to get rich
Stock options have been the compensation lottery ticket for decades in Silicon Valley and across public companies. Sign on with a start-up or newly public tech company and you may not take home a multimillion-dollar paycheck, but you may strike it rich with stock options. Since paying a regular dividend cuts the stock price and essentially lowers the value of the options, why would options-owning managers choose to pay a dividend and take a pay cut?

One of the companies hoarding cash is investor favorite Apple, which has $76.2 billion in cash and securities and isn’t paying a dividend. But employees are making a killing on stock options.

According to Apple's latest quarterly filing, since the last fiscal year ended on Sept. 25, 2010, Apple employees have exercised 7.8 million stock options at an average price of $63.20. With shares having moved between $300 and $400 for most of that time, if you assume an average sale price of $340 per share after exercise, that would equate to $2.2 billion in extra compensation. To put that in perspective, Apple only spent $1.8 billion on research and development over the same nine-month period. And there were almost 13.8 million more stock options outstanding as of June 25.

Google (Nasdaq: GOOG  ) is another company that has rewarded employees with stock options. Google has nearly 11 million options outstanding with a weighted average exercise price of $347.36. That amounts to around $1.9 billion in extra compensation for employees at today’s stock price.

The art of the special dividend
One thing these companies could do is pay out a special dividend. When Microsoft began paying a dividend, it reduced its cash load by declaring a one-time special dividend of $3 per share. These are treated differently than regular dividends for stock options and actually adjust the price of the option. If I had an option that exercised at $20 and a special dividend of $3 is paid, now the option is exercisable at $17. It doesn’t affect employee’s option value the way a regular dividend does.

Self-interest plays a role
Stock options can help align employees’ best interests with investors, but don’t think those options don’t affect decision making. Options are a huge part of compensation, especially when a stock is rising, so there’s some self-interest on management’s part. And anyone’s decisions would be affected if billions of dollars were on the line.

You can hope that Apple, Google, or any other tech company will pay a dividend with their large cash hoard, but I’m not holding my breath.

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Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

The Motley Fool owns shares of Apple, Google, and Microsoft. The Fool owns shares of and has created a bull call spread position on Cisco Systems. Motley Fool newsletter services have recommended buying shares of Apple, Google, Cisco Systems, and Microsoft, as well as creating bull call spread positions on Microsoft and Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 24, 2011, at 3:43 PM, dbtuner wrote:

    Hmm. And all this time I thought the BOD and management had a fiduciary responsibility to investors and instead they are putting themselves first.

    Good points made in this article

    So why doesn't Congress change the law and make regular dividends and special dividends on par, thus reducing the strike price of the option?

  • Report this Comment On August 24, 2011, at 7:20 PM, 102971 wrote:

    The most important point you make in your article is that most of this cash hoard is being held overseas since to bring it back to this country would mean paying corporate tax on it at the horrendously high rate that we have. I'm not generally in favor of cutting tax rates (in fact, I believe that some personal rates need to be increased) but the corporate tax rate we have in this country is not only keeping these profits overseas, it is also keeping jobs overseas. I believe that a reduction in the corporate tax rate to, say, 15%, would induce large corporations to bring these profits back home together with the jobs that go with it. It would not decrease the amount of corporate taxes that the government receives. Overall it would INCREASE it quite substantially.

  • Report this Comment On August 24, 2011, at 7:26 PM, techy46 wrote:

    Congress should eliminate the US corporate tax, tax rate of zero, make all capital gains and dividends taxable as regular income and only allow corporations to retain profits equal to 10-20% of operating cash flow. That would speed up the velocity of money, eliminate US corporate disadvantage and generate more tax revenue for US government.

  • Report this Comment On August 25, 2011, at 9:40 AM, spoonieluv wrote:

    @ techy46 "...and only allow corporations to retain profits equal to 10-20% of operating cash flow."

    No, thank you! The gov't shouldn't make illegal the retainage of one's own profits. That is so ludicrous and such an overstepping of government power I don't even know where to begin. Corporations should be able to manage their money however they see fit. If corporations were forced to retain only 10-20% of cash flow, then you essentially eliminate a company's "rainy day fund" and limit everyone's ability to weather any kind of financial disaster - whether anticipated or not. That is the scariest thing I've heard of in quite some time and I can't even begin to tell you how against that line of reasoning I am.

    The government should instead incentivize corporations to bring their money back home through lower corporate tax rates and repatriation tax periods.

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