Until telecom's trouble subsides,
plans to buy some time with investors by sharing more of its cash pile.
growing trend among cash-generating big tech shops, SBC has been shelling out bigger and bigger checks to shareholders as a passive economy and aggressive competition continue to undermine its top line. The rationale behind the strategy was in evidence again Thursday, when the company posted
mixed second-quarter earnings.
Seems where growth's been slow, dividends will grow. For the second consecutive quarter, SBC has increased its payout in the form of one-time dividends. Earlier in the just-completed second quarter, SBC issued a special 10-cent special dividend on top of its 28-cent regular quarterly distribution. And that bonus came just months after the company dished out a nickel in addition to its regular quarterly check.
Having reduced debt by $2 billion and posted $1.4 billion in profits during the second quarter, SBC certainly has the wherewithal to give a little back to investors.
"As long as these companies have no better place to put their money, it makes sense to give it back to their shareholders, either through stock buybacks, dividends or retired debt," says Jefferies & Co. analyst Richard Klugman.
The cash prizes also help sweeten the
bitter news that SBC reported in its second-quarter results. While the company beat analysts' profit estimates, the earnings and revenue numbers were down from year-ago levels. And what's perhaps even more troubling is the sight of receding operating margins, with no assurance that that troubling trend will be reversed anytime soon.
Source: Company. *Quarterly dividends plus special distributions.
Indeed, SBC executives say margins will continue to narrow. They point to the costs involved with promoting and selling new services like digital subscriber lines and old ones like long distance. Executives did note on the earnings call Thursday that selling each customer more services increases revenue per user, which helps offset the lower margins.
Outside of SBC's joint marketing agreement with
to add satellite TV service to its roster of products, CEO Ed Whitacre said there were no major cash-intensive initiatives in the hopper. Whitacre said he was "managing conservatively," which analysts took to mean that he would use his $5.1 billion cash pile to do more of the same debt paydowns and dividends.
CIBC World Markets analyst Tim Horan says he's encouraged by the strategy.
"With so much uncertainty in the industry, they're right to hang onto their cash until they figure out what to do with it," says Horan, who has a buy rating on the stock. CIBC has no underwriting ties to SBC.
"Right now," says Horan, "the strength of their balance sheet gives them an edge on the more heavily leveraged cable companies."