Monday December 15, 11:44 AM
RPT COLUMN- As tech stocks slump, dividend yields leap- Auchard
By Eric Auchard
LONDON, Dec 15 (Reuters) - The irony of the market rout of technology stocks is that growth investors find themselves sitting on potentially rich dividend payouts as yields have multiplied while stock prices have plunged.
Technology companies that once sneered at paying more than token dividends instead of funding the rapid growth of their own operations now find themselves promising investors meaningful yields, often well above government rates.
Take Intel Corp, the world's largest chip maker. Since 1992, it has paid a small dividend that amounted to around 2 percent last year. Now, with its stock cut nearly in half, it yields a healthy 4.2 percent rate.
As many big technology stocks have plummeted 50 to 75 percent or more this year, dividends, which are paid out in fixed amounts per share, have doubled or tripled in value.
Graham Tanaka, a New York fund manager who runs Tanaka Growth Fund says relatively high dividend yields simply reflect how cheaply priced many technology stocks are.
'Having said that, in an environment like this, IBM (NYSE: IBM - news) , which offers steady growth with a dividend, maybe is the kind of company I would like to own,' Tanaka said. IBM pays a dividend that amounts to 2.5 percent annually.
Other big-name technology stocks with dramatic dividend yields include storage maker Seagate Technology Inc with a 10.6 percent annual dividend payout. Chip makers Taiwan Semiconductor and United Microelectronics each offer dividends of around 7 percent.
The American Depositary Receipts of Nokia (Xetra: 870737 - news) pay out 6.2 percent and Ericsson (Stockholm: ERICB.ST - news) is at 5.8 while ST Microelectronics pays a 4.7 percent dividend.
In general, major tech stocks in Taiwan, Korea and Europe are far more likely than their U.S. counterparts to pay dividends. One exception are U.S. analog chip makers. Analog Devices Inc pays out 4.8 percent, Linear Technology Corp (NASDAQ: LLTC - news) pays 4.2 percent, National Semiconductor (NYSE: NSM - news) is at 3.1 while Texas Instruments (NYSE: TXN - news) offers a 3 percent annual yield at current stock levels.
'One could say some that dividend-paying tech companies with loads of cash have better balance sheets than the U.S. government,' said Mike Holland, chairman of investment company Holland & Co. The 10-year U.S. Treasury bond yields 2.7 percent in the current market.
ARE TECH DIVIDENDS SAFE BETS?
No tech fund manager buys a stock solely for its dividend, although in the current market, investors see the stocks as an added inducement that offers a kind of floor to offset some measure of stock declines.
To be sure, no dividend can match the percentage gains from a successful growth stock on the move. 'In the volatility we have in this market, dividend returns can be gained or lost in a single trading session,' Rogoff notes.
The highest tech stock dividend is paid by Siliconware Precision Industries Ltd, Taiwan's No. 2 chip packaging firm, which promises a 22 percent yield after a 55 percent decline this year in its stock price to below $4.
Such improbably high dividends from putative growth stocks begs the question of how sustainable such rates are as the global recession plays out.
That's exactly what happened to the 10 percent yield Anglo/Dutch computer services company Logica (LSE: LOG.L - news) plc until the company cut its dividend in half last week as part of a plan to raise capital and cut debt.
'If the dividend seems too good to be true, then it is a good time to sell the stock,' says Ben Rogoff, a growth-oriented fund manager with Polar Capital Technology Trust in London.
The risk is that a company may choose to scale back the payout before the annual date on which it is scheduled to be declared, he said.
To be sure, some tech companies with high dividends have struggling businesses that could put dividends at risk. Alcatel (Paris: FR0000130007 - news) -Lucent's 11 percent rate and Motorola (NYSE: MOT - news) 's 5 percent payout leap off a list of vulnerable names.
But while companies are scaling back dividends across the corporate world, many technology companies are well-positioned to keep them up because they sit on piles of cash built up in the 1990s and earlier this decade. As of September, Intel (NASDAQ: INTC - news) counted $12 billion in cash while IBM had nearly $10 billion.
An extreme example is another Silicon Valley chip maker, Linear Technology, which disproves the old view that tech stocks are too volatile to pay consistent dividends. Since 1992, it has managed to increase its dividend every year and gives no sign of scaling back, even in the current bruising market conditions.
Still, there is no substitute for solid stock gains. 'All of us would like to have a higher stock price, even if that brought with it a lower dividend payout rate,' Linear Chief Financial Officer Paul Coghlan said in a phone interview.
But following the tech downturn of 2002, a debate occurred on Wall Street about what tech companies should do with mounting piles of cash and whether they should pay dividends as the days of hyper-growth faded. At the time, software giant Microsoft Corp (NASDAQ: MSFT - news) initiated a dividend that now pays 2.6 percent.
Many others refused, including Cisco Systems Inc (NASDAQ: CSCO - news) . which achieves much the same effect by buying back shares of its stock as a way to offset options dilution and to boost earnings per share.
Cisco, which had cash on hand in October worth one-quarter of its current $100 billion market capitalization, cut total shares outstanding by 3 percent last year, net of employee stock options.
Growth investors have long favoured net stock buybacks over dividends because they were averse to cash payouts for tax reasons. These days, it is hard to imagine an investor that would hesitate to take cash wherever they can find it.
-- At the time of publication Eric Auchard did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. For previous columns, Reuters' customers can click on --
(Editing by Chris Wickham) Keywords: COLUMN DIVIDENDS/ Keywords: COLUMN DIVIDENDS/=2 Keywords: COLUMN DIVIDENDS/=3
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