Lazy Data Sets and Technology Dividends

Bloomberg reported and Barron’s amplified a very weakly corroborated story that technology stocks underperform when they begin to pay dividends.   Timothy Ghriskey of the Solaris Group among others claims it’s “probably not a good thing.”  The proof of this?

Apple Inc., Dell Inc. (DELL) and SAIC Inc. (SAI) are among the 13 companies in the S&P 500 that have initiated a quarterly payout this year, according to data from S&P. Dell dropped 11 percent and SAIC slumped 6.9 percent since announcing the decision, while Apple is up 13 percent.

and

Investors who bought Microsoft after the world’s biggest software maker started paying 8 cents a share in 2003 would have been better off owning its competitors. The Redmond, Washington- based company rose 5.9 percent that year, compared with a 47 percent surge for S&P 500 computer stocks. Technology companies that don’t pay a regular dividend make up seven of the 10 biggest gains in the industry since January 2003.

Ten years sounds like a long time in the course of things but this particular ten year period comes after:

a) a significant change in 2002 in the tax treatment of dividends, lowering the rate to 15% at the federal level: this ironically may have made some companies give out more in dividends than they should (see: Citibank!)

b) the largest run up in the history of technology stocks followed by a two year shake out when nearly every non-dividend paying technology stock dropped by 90%+.  A tweak of the window of study to fifteen years would generate tremendously different results.  Nearly _any_ 10 year period would produce dramatically different results.

c) Microsoft announced a $3 special dividend in 2004, characterized by Rick Sherlund, the famed Goldman Sachs software analyst as “breathtaking.”  So besides the fact from the second quote MSFT’s peers were coming off lower lows this alone was a 10% return.  The theory of risk-adjusted returns has some flaws, most notably how one calculates risk but if you were to look at risk-adjusted returns with this special dividend in mind the results were almost certainly different from what is described.

Dividend paying “tech stocks” including IBM, Texas Instruments, and the like almost certainly outperformed non dividend paying stocks; it is the tech companies that _cut_ their dividend (Kodak, Xerox, etc.) which is probably the more reliable forward-looking indicator.

It’s true dividend paying tech stocks are in a different phase of their corporate lives, and are no longer as high growing (read: capital intense.)  But high growth famously comes at a price for technology stocks.  Investor return?  That’s another matter.  In Jeremy Siegel’s “The Future for Investors” he writes about stock returns up to 2003 (p. 126):

From 1871 through 2003, 97 percent of the total after-infaltion accumulation from stocks comes from re-investing dividends.  Only 3 percent comes from capital gains.

Technology companies do really stupid things with large cash piles; even small tech startups lose discipline when they get their Series A wires in.  That technology companies return capital as large cap growth companies should be expected and should be demanded.  If you can find the 5 successful hypergrowth tech companies out of the 100 or so possible by all means skip the MSFT dividend.

 

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