Dividends sail back from land of disdain

Microsoft's surprise, Bush's proposal look like good things for investors

January 18, 2003|By William Patalon III | William Patalon III,SUN STAFF

Microsoft Corp.'s decision to start paying a dividend is most likely the start of a trend among growth companies, thanks to shifting investor priorities, a downtrodden economy and a presidential proposal to make most of the payouts tax-free to investors, professional investors said yesterday.

Software giant Microsoft, in a surprise move Thursday, said it would begin paying an annual dividend of 16 cents a share and would split its stock 2-for-1, making the dividend 8 cents on the increased number of shares. Just like most of the other high-growth companies of the late 1990s, Microsoft had for years rejected the dividend concept - even as its cash hoard spiraled past $43 billion.

But, with Microsoft having taken the lead, some companies will do an about-face on their anti-dividend stance, experts said.

"I do think it's the start of dividends coming back into fashion," said Tom Huber, mutual fund manager of the T. Rowe Price Dividend Growth Fund. "During the last five or six years, dividends had fallen out of favor. With the market compounding at a 20 percent-plus a year pace, investors overlooked the 2 to 3 percent they got from dividends.

"But if you look back over history, dividends have traditionally made up about 40 percent of the total return" that stocks have earned for investors, Huber pointed out.

After a bear market that's caused three straight losing years, investors are suddenly paying attention to history again, and are seeking out stocks with that 2 percent to 3 percent dividend yield, professional investors said.

While that new investor priority has certainly caught the attention of corporate executives, so, too, has President Bush's proposal to end the tax investors pay on dividends they receive, said James Hardesty, president of Hardesty Capital Management in Baltimore.

"I think there is some logic to the president's contention that the double-taxation [on dividends] should end," Hardesty said.

Professional investors have long groused about that double-taxation, contending the government taxes the same money twice: First, when a firm records a profit, and then again when a percentage of that profit is paid out to shareholders as a dividend. Bush's proposal would eliminate the tax on investors, Hardesty said.

Double-taxation is one reason dividend payouts have tailed off in recent years, but experts said a bigger reason may be that even as corporations were recording record profits in the last half of the 1990s, many preferred to hoard their cash.

Most previously paid

Until recently, at any point in history, only about 50 of the 500 largest U.S. public companies did not pay dividends, said Richard Cripps, chief market strategist for Legg Mason Inc. Now, however, 139 members of the Standard & Poor's 500 index do not pay dividends, he said.

And even those payouts are at their nadir, Cripps said.

"If you look at S&P 500 profits, and the percentage of dividends paid, we're at a low point in U.S. history - about 35 percent," Cripps said.

Historically, that figure is around 50 percent, he said.

During the past five years, dividend payouts by S&P 500 companies have advanced at a rate of less than 1 percent a year - far below the 5 percent growth rate of the previous half-century, according to Cripps.

Some firms have tried to reward shareholders in other ways, such as by repurchasing shares, which could help improve their per-share earnings figure, a number with which Wall Street has remained obsessed. For other firms, however, those share repurchases did little but cover the huge option grants made to their executives and employees, said T. Rowe Price's Huber.

Amassed cash

Many firms - particularly technology firms such as Microsoft - disdained dividends, preferring to amass cash that could be used to finance research and development, acquire companies or technologies, or just serve as a corporate rainy-day fund for recessionary runs, Huber said. During the boom, the experts said, a high-tech company starting a dividend program was seen as conceding that it lacked significant opportunities to continue its frenetic growth pace.

The economy has dropped off, but so have the number of investment opportunities for these companies, Huber said. Microsoft, with its $43 billion war chest, realized that it has ample money to finance its growth, while still rewarding shareholders with the start of a modest dividend program, he said.

At 16 cents a share, the dividend yield on Microsoft shares is about 0.3 percent. By contrast, Philip Morris Cos. Inc., which has paid dividends for many years, yields about 6.1 percent. The S&P 500 index has a yield of about 1.8 percent.

Huber said he expects other firms to follow Microsoft's lead. Among his top candidates: Internet-equipment giant Cisco Systems Inc., computer-maker Dell Computer Corp. and media conglomerate Viacom Corp. They fit the profile of the new dividend-payers - cash-rich and shareholder friendly.

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