Don't Scoff at Tech Dividends

NEW YORK (Real Money) -- Recently, Bloomberg ran a story suggesting that the decision by certain tech companies to pay higher cash dividends in 2012 was a show of weakness and in fact a heads-up on a coming bear market in their stock prices.

This observation was based on:

1.) Conventional thinking that technology companies are investable only when they are in their fast growth stage and not as mature businesses.
2.) Very short-term observations about a handful of tech companies that had recently raised their dividends, compared with those tech companies that did not increase their payouts.

We look a bit askance at this. First, on the basis of a short reporting period, the article purports to make a much more general point that paying dividends by tech companies is a sign of lost mojo, of -- dare we say it -- maturity, and all the unexciting things that go along with that status.

There are a few problems with this thesis. First of all, Apple (AAPL), the epitome of runaway tech success and rampant market outperformance, now pays a dividend, which it initiated this March. Cisco Systems (CSCO), another tech giant, had been in the doldrums until it raised its dividends this August.

Some may say that these are the exceptions that prove the rule. But even if the correlation of tech companies' short-term market performance and dividends is less than clear, the article does raise the question of the implications of tech companies paying a dividend.

Perhaps the concept is outdated that tech companies, by paying dividends, are signaling that they have no "better" use for the cash. We believe this for a few reasons.

In some cases, companies that kept all their cash often misspent it on unprofitable initiatives or ill-conceived acquisitions. This kind of thinking reigned supreme when these companies were trading at astronomical price-to-earnings ratios. Paying out cash would have shone a harsh and unflattering light on those multiples.

Today, taking shareholder needs into account is indeed a sign of maturity, and this should be considered a very favorable development.

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