Isn't it time high-tech grows up? The tech sector is the biggest money earner and pays out more in dividends than any other industry group, according to S&P Capital IQ data. But in the present earnings season, it's the sector's inconsistency that has been on full display.
Apple managed to beat Wall Street's expectations this week, but earnings were down $2 billion and iPad sales dropped. Google and Microsoft have both reported disappointing results.
But even as the sector is reporting bottom-line busts, it's generating cash at record levels and paying out dividends at an ever-faster rate. That sounds like the model of a mature business, but finding a tech company that steadily grows earnings and predictably increases dividends is still a tough proposition.
"The tech sector will never mature because it is a new-product sector, and the stocks are not going to move with the market and they are not going to move on dividends. It's still all about innovation," says Susan Fulton, owner of FBB Capital Partners. "They have to keep reinventing themselves."
But as the likes of Microsoft and Intel become known as reliable dividend payers, the sector is suffering from a blurred image among investors, analysts say. Executives who once shunned dividends because such payouts would signal that their companies were no longer growing have changed their opinions partly due to shareholder pressure. Still, it's not clear that more generous dividend payments have helped share prices.
The tech sector has boosted its dividend yield to 1.9 percent from 1.2 percent over the past two years, nearly reaching the S&P 500's average yield of just over 2 percent, which has remained relatively unchanged, says Scott Kessler, head of tech equity research at S&P Capital IQ. About half of all companies in the S&P making their first dividend payout were in the tech sector during that period.
"The yields have increased substantially over the past couple of years," Kessler says. "But the tech sector still sells at a discount to the overall market. The dividends have really not made much of a difference."
Can you expect dividend increases if you own tech stocks? In many cases, yes, Kessler says. "They have the wherewithal to pay more. They have very profitable business models, very strong balance sheets. They are really overcapitalized," he says.
Basically, that means they have too much money for their own good. That cash has to be reinvested in growth or paid out in dividends. Another alternatives, such as letting the cash sit in foreign bank accounts that go untaxed by the United States, for example, could cause major controversy, as it did for Apple this year.
For tech companies, the innovators' dilemma is compounded by shareholder demands. "People want innovation, and yet they criticize every effort at investing in new products and suggest the companies are not doing enough for shareholders," Kessler says.
That was apparent in a number of the latest quarter's results for big tech companies. A few highlights:
• Google, always a big investor in new products, disappointed with weaker earnings as its mobile investments led to an unusual profit decline despite higher revenue. Its stock fell 1.5 percent on the report.
• Microsoft's shares dropped 15 percent in the week after it took a charge of nearly $1 billion related to its struggling tablet computer. It pays a dividend of 2.6 percent.
• Apple's earnings dropped $2 billion from a year ago, the result of failing to meet new competition with new products. Samsung, its biggest competitor, has been growing more quickly globally. Still, Apple's stock was sharply higher after results this week topped expectations. Earlier this year, the company announced a $100 billion plan to pay for stock dividends and share buybacks.
• Yahoo reported higher earnings, but its core advertising and search revenue fell sharply. The company has made a string of acquisitions to boost growth. It pays no dividend now, but Yahoo has been the target of activist investors who dogged the company after it refused a premium buyout offer from Microsoft five years ago. It bought back $1.2 billion in shares from Daniel Loeb, another activist investor, earlier this week, leading to a 5 percent decline in its stock.