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Bloomberg published an interesting article earlier this week. "Technology Stocks With Record Dividends Send Bearish Signal" was the headline.
The theory was simple. Tech companies have been boosting their dividends lately. That could mean trouble for investors -- a sign that management can't invest in high-growth projects anymore and has nothing useful to do with cash other than give it to shareholders. "The signal that they are sending to the shareholders is, 'look, growth prospects just aren't there," it quoted one money manager as saying.
Logically, this makes sense. But in practice, I think it's totally wrong. Tech investors should love that these companies are cranking up their dividends.
The idea that big tech companies have foregone dividends so they can save cash to invest in growth just isn't right. Most have been cash cows for well over a decade. And a huge portion of their cash -- for some companies, literally all of it -- has gone toward one thing: share buybacks.
How have the returns on those buybacks been? Utterly devastating.
I looked at five of the largest tech companies' buybacks from 2004-2011. Comparing buybacks to current share prices shows how much each company has gained or lost on the investments. The results should make you want to cry:
Share Repurchases, 2004-2011 (millions)
Current Market Value of Shares Repurchased (millions)
|Intel (Nasdaq: INTC )||$49,881||$51,237||$1,355|
|Dell (Nasdaq: DELL )||$24,864||$10,532||($14,331)|
|Hewlett-Packard (NYSE: HPQ )||$57,800||$28,103||($29,697)|
|Microsoft (Nasdaq: MSFT )||$100,958||$114,225||$13,267|
Source: Company filings, author's calculations.
By "loss," I mean the difference between current share price and the price paid for shares when they were repurchased. These losses don't show up on income statements, but they erode shareholder wealth all the same.
Since 2004, these five companies have generated a combined buyback loss of $37 billion. That's about equal to the market cap of Ford. HP's buyback losses since 2004 equal 85% of its current market value. Microsoft and Intel repurchased shares at an average cost below current share prices, but not by much. The return both companies earned on share repurchases since 2004 have severely lagged the S&P 500.
Oh, how terrible it would be if these companies had been paying dividends instead.
I left one company off the list: Apple (Nasdaq: AAPL ) . It just recently began paying a dividend and repurchasing shares, but its record of cash management is hardly clean. Apple's growth and profitability have ballooned its hoard of cash and cash equivalents to more than $100 billion. That cash earned an average return of 0.77% last year. Factor in inflation, and Apple's bank account is losing purchasing power to the tune of about $2 billion a year. That's more than the company earned in total profit as recently as 2006.
Oh, how terrible it would be if it had been paying a dividend instead.
Investors Cliff Asness and Rob Arnott have actually showed that, on average, future earnings growth is the fastest when the dividend payout ratio is the highest, and vice versa. In a 2003 paper titled "Surprise! Higher Dividends = Higher Earnings Growth," they wrote: "Unlike optimistic new-paradigm advocates, we found that low payout ratios (high retention rates) historically precede low earnings growth." Companies that withhold earnings in the name of growth have an unmistakable propensity to squander it on poor investments -- like overpriced buybacks.
Bloomberg's article ends with a warning from a money manager: "You can have technology companies that are going to be more like utilities," he said.