Thursday, March 24, 2005 7:16:19 PM
Yahoo!, Dell and other techs plan to repurchase shares. That's nice...but what about dividends?
March 24, 2005: 5:54 PM EST
By Paul R. La Monica, CNN/Money senior writer
http://money.cnn.com/2005/03/24/technology/techinvestor/lamonica/index.htm?section=money_latest
NEW YORK (CNN/Money) – Tech stocks have been bruised and battered this year. But some companies are sending strong signals that they think their stocks are now bargains.
Two tech leaders announced stock buyback plans this week. On Thursday, Yahoo! (Research) said it had authorized a plan to repurchase as much as $3 billion worth of its stock over the next five years.
A day earlier, Applied Materials (Research) said it approved a $4 billion program.
Investors liked the news. Shares of AMAT shot up 2.5 percent on Wednesday and Yahoo!'s stock was up nearly 3 percent Thursday morning.
Why are buybacks a good thing? With fewer shares on the market, earnings per share should increase boosting overall value. And if the company thinks it's own stock is worth buying, the thinking goes, that must be a good sign.
Yahoo! and AMAT have lots of company in the buyback parade. Since February, there have been buyback announcements from Qualcomm (Research), Dell (Research), First Data (Research), Broadcom (Research) and KLA-Tencor (Research).
Do all these companies really think that their stocks are that cheap? It could be. The Nasdaq has fallen nearly 10 percent so far this year.
But investors need to be wary of embracing companies that announce buybacks for a couple of reasons.
Sign of value or necessary evil?
For one thing, there is a difference between simply saying that you will buy back stock and then actually going out and doing it. All Yahoo! indicated is that it can buy back $3 billion's worth of shares. It isn't obligated to do so.
So investors need to check back to see if companies follow through. To their credit, both Dell and Applied Materials have actually bought back sizable amounts of shares in recent years. Cisco Systems (Research) has also been a big repurchaser of its own stock.
A second issue is that buybacks are often done by tech companies simply because they need to offset the effect of new shares flooding the market after employees cash in on stock options. That's a big difference between saying your stock is a bargain.
So for companies like Yahoo! and Broadcom, which both have seen their share count rise sharply in recent years, the buybacks may be more of a way to combat potential earnings dilution from options that are exercised.
With that in mind, expect more buyback announcements from large tech companies since many are still big granters of options and are sitting on sizable amounts of cash. eBay (Research) and Google (Research), for example, each have $2 billion in cash on their balance sheets. Apple (Research) has about $6.5 billion.
And there are only a few choices that companies have regarding their cash. They can reinvest it into the business. They can, like Oracle (Research), go on an acquisition hunt. Or they could buy back stock. Many companies will probably argue that the latter option is the best use of their cash.
Don't forget dividends
But wait. Isn't there another way to deploy cash? What's that thing called where investors get quarterly payments from companies they own stock in? Oh yeah, a dividend.
Applied Materials appeared to get that message. The company also announced Wednesday that it would begin issuing a quarterly dividend of 3 cents a share in June. Based on that payout, the dividend would yield 0.7 percent.
That's a step in the right direction and will hopefully put pressure on other techs with a lot of cash like Cisco, Dell and Oracle, to name a few, to start paying dividends as well.
Sure, some tech diehards argue that a dividend is a sign of maturity and the end of a company's growth phase and point to Microsoft (Research) and its stagnant stock price during the past few years as proof.
But Microsoft hasn't been a snoozer of an investment for the past few years because it pays a dividend. After all, Wall Street hasn't penalized Qualcomm. Shares of the wireless chipset company have nearly doubled since it announced it would begin paying a dividend two years ago.
So if tech companies really want to show investors they're serious about using their cash to reward shareholders, they might want to take a page from the book of Microsoft, Qualcomm and AMAT and start paying dividends in addition to buying back stock.
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