In the past few years, I've continually marveled at the stunning
piles of cash parked on the balance sheets of many high-tech firms.
These companies had been holding lots of cash to stay strong in
case industry conditions waned. But even with the sharp economic
blows of 2008 and 2009, their cash piles just kept growing. They've
been saving for a rainy day that's likely to never arrive.
I've also been noting how these companies could boost
by committing much of that cash to stock buybacks. Yet software
giant CA Technologies. (NYSE:
) may have upended that theory. In late January, the company
announced plans to super-size its
, from $0.20 a year to $1 a year. The
suddenly shot up from 1% to more than 4%.
CA can surely afford the higher dividend. The $500 million a year
it now plans to spend on dividends still keeps the
, in relation to
free cash flow
, at around 32% (according to analyst at Evercore Partners), while
the company's $1.25 billion net cash position remains intact.
doesn't go toward the dividend will be used for stock buybacks and
acquisitions, according to management. You have to applaud any
company that takes proactive steps to utilize a strong
and reward shareholders in the process.
Shares of CA popped nearly 10% on the news, which means just one
thing: Other cash-rich software firms know that any similar move to
either initiate or hike a dividend will be warmly greeted by
So who's next? The table below gives a clear sense of net cash in
relation to a company's
(all figures are based on the most recently-issued quarterly
Frankly, as CA learned, any company with a dividend yield of just
1% isn't going to get much respect. You need a
above 3% or 4% to really get interest.
, with its 3% yield, also understands that.
Before you quickly scramble to see what these companies could do
with their mounds of cash, I'll save you the trouble.
First of all, disk drive maker
Western Digital (NYSE:
may not be the bargain you may expect after its shares have run up
more than 50% in the last three months. The company has $400
million remaining on a current buyback plan, and has never offered
up a dividend. The hard disk industry is so volatile that Western
Digital may never do so. Still, $3.7 billion in net cash earning
almost zero interest begs for investors' attention.
What other companies may look to start or hike a dividend? Well,
let's use CA's 30% to 35% payout ratio as a
that other firms may consider. This could help a firm like security
software vendor Symantec (Nasdaq:
up a 4% to 5% dividend yield. Also, software firm
BMC Software (NYSE:
could easily support a 3% yield.
Maturity equals payouts
For companies that have ample new growth opportunities ahead of
them, dividends don't make sense yet. For a firm like IAC
), which owns leading web sites such as Match.com, there are ample
opportunities to be reviewed in the quarters ahead. So IAC would
like to retain its cash for now.
Yet firms in the semiconductor industry would be much more
hard-pressed to find tangible growth opportunities through the
M&A route. Chip makers such as
LSI Logic (NYSE:
have settled into middle-age: Sales for LSI haven't budged above
10% since 2007, and Altera also appears to be stuck in the $2
billion annual revenue range. Yet each company has tossed off
considerable free cash flow, even as the top-line remains anemic.
Evercore's Kirk Materne has the solution for companies like this:
"The fact that more companies are delivering only moderate revenue
growth (+5-10%) and are getting little credit for their strong cash
flow could force more software management teams to evaluate
dividends as a more effective way to return cash to shareholders as
well a way to attract a new set of investors to the story,
especially with interest rates expected to remain at low levels for
the foreseeable future."
Risks to Consider:
These companies may finally look to put a robust dividend in
place only a year or two before interest rates finally start to
rise up form multi-decade lows. If rates rise high enough, then the
dividend appeal for these tech firms would greatly diminish as they
will never be truly high-yield plays.
Action to Take -->
It's been more than a decade since the dot-com era ended, and
companies are only now realizing that the days of go-go growth in
high-tech are over. CA's move to radically hike its dividend is a
likely harbinger of major changes underway in the tech sector. In
an era when companies will be pressed to return excess cash to
shareholders, it pays to see which firms can handle a dividend
hike, and to what extent. The companies that are likely to follow
though on this will be the ones you'll want to own ahead of
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-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of INTC in one or more if its "real money" portfolios.
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