On Monday, Eric Jhonsa asked Does Apple Really Need Its $40 Billion?, referring to the company's enormous cash balance, and concluded that the answer is "no." But in the technology sector, Apple (Nasdaq: AAPL) is hardly an exception in that regard; indeed, hoarding cash appears to be the rule -- one that shareholders need to be aware of because it's costing them lost returns.
Here's the proof
You want proof of this phenomenon? I gathered balance sheet data for all companies in the S&P 500 in order to compare the cash position of those in the information technology sector with that of all the companies in the index (minus financials, which, by virtue of their heavily leveraged balance sheets, don't conform to this analysis). These are the results:
|
Cash and Short-Term Investments as a % of Market Capitalization, Average* |
Net Cash and Short-Term Investments as % of Market Capitalization, Average** | |
|---|---|---|
|
S&P 500 Information Technology Sector |
20% |
7% |
|
S&P 500, ex-Financials |
13% |
(24%) |
Source: Author's calculations, based on data from Capital IQ, a division of Standard & Poor's.
*Latest quarter. **Net of all borrowings, including capital leases (fiscal year 2009).
The first column shows that tech companies' cash and short-term investments represent, on average, one-fifth of their market value, 7 percentage points ahead of the average non-financial. One might be tempted to think that higher cash levels in the tech sector are offset by higher debt, but the second column shows that simply isn't the case -- in fact, the difference in net cash position (i.e., after subtracting all debt) between the two groups is even wider. The average non-financial has a negative net cash position, while the average company in the information technology sector has excess cash on its balance sheet.
More cash, lower dividends
Despite (or perhaps due to) the fact that they are flush with cash, the market-value weighted average dividend yield of S&P 500 stocks in the information technology sector is 0.91% -- less than half the average dividend yield of all stocks in the index (1.92%). Here are a few companies that look like some of the worst "offenders":
|
Company |
Net Cash and Short-Term Investments as % of Market Capitalization* |
Dividend Yield |
|---|---|---|
|
Novell (Nasdaq: NOVL) |
59.5% |
-- |
|
Electronic Arts (Nasdaq: ERTS) |
46.1% |
-- |
|
Dell (Nasdaq: DELL) |
26.5% |
-- |
|
Motorola (NYSE: MOT) |
25.8% |
-- |
|
VeriSign (Nasdaq: VRSN) |
19.5% |
-- |
Source: Author's calculations, based on data from Capital IQ, a division of Standard & Poor's.
*Latest quarter.
None of these companies pay a red cent in dividends, yet net cash per share represents a fifth or more of their value. And while a couple of these companies have had a few rocky years recently in terms of their ability to generate consistently positive unlevered free cash flows (Electronic Arts, VeriSign), (1) the lack of any dividend from these two companies predates this period, and (2) VeriSign hasn't been shy about putting up quite a bit of cash to repurchase its shares.
Where are the growth stocks?
I think this state of affairs is the result of a perception problem -- executive managements believe that paying a dividend is an admission that their stock is no longer a growth share, and won't, therefore, deserve a premium multiple. This perception issue finds an ally in financial theory, which dictates that retained earnings contribute to future earnings growth -- but that assumes they are reinvested at attractive rates, either internally or through acquisitions.
However, the average analysts' estimate of long-term earnings-per-share growth rate for information technology stocks is identical to the average estimate for all S&P 500 stocks (10.3%). Analysts don't appear to be giving tech companies any credit for their higher earnings retention rate, which suggests they don't believe the retained earnings will contribute to future earnings growth.
A no-dividend disgrace
After a decade during which dividends contributed more than 100% of the total return on stocks (the S&P 500 index declined), many tech companies should swallow their pride and imitate one of their sector's bellwethers, Microsoft (Nasdaq: MSFT), which began paying a dividend in 2003. Not doing so is a show of disregard for their shareholders -- it's a great shame that institutional shareholders don't react accordingly by pressing managements to return some of shareholders' cash via special or ordinary dividends.
Are you interested in stocks that do reward their shareholders with a solid dividend? Here are six stocks that The Motley Fool's top dividend-focused analysts are watching.
