Tech's Telltale Sign of Middle Age
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Welcome to middle age, technology industry.
The best sign of the sector's grownup status is how much of tech companies' available cash is going toward that ultimate market dowager: stock dividends.
The median big technology company allocates about 22 percent of its free cash flow to dividend payments, according to an analysis by Bloomberg Intelligence analyst YC Koh. That's not far off the median 25 percent share for the broader S&P 500, packed with boring utility companies, boring real estate firms and the company that makes Scotch tape and lint rollers.
Tech for Widows and Orphans
The median big tech company now spends 22% of its free cash flow on dividends. That is approaching the share of dividends paid by the broader S&P 500.
Source: Bloomberg Intelligence analyst YC Koh
Spending one-quarter of free cash on dividends is a classic symptom of creeping middle age. Tech buddies, soon you also won't care what people think about your cargo shorts. You'll have to ice your knees after playing basketball. You'll wonder whether people notice those crow's feet around your eyes. (Yep. They do.)
The tech sector is getting so old and boring that it contributes nearly 16 percent of the S&P 500's dividends, up from less than 6 percent in 2006, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices LLC.
Rising Dividend Star
The tech sector contributes nearly 16% of the S&P 500's dividends. A decade ago, it was less than 6%.
Source: S&P Dow Jones Indices LLC
Yet old and boring looks pretty good to the many investors hunting for steady cash-paying stocks at a period of ultra-low global interest rates. Strong dividend-paying tech firms like HP Inc. and International Business Machines Corp. rallied earlier this year despite deteriorating business fundamentals, Bernstein Research analysts led by Toni Sacconaghi wrote in a report in August.
In fact, the technology stocks that entered the year with the top 20 percent dividend yields outperformed the lowest yielding by more than 11 percentage points, the analysts wrote. And 80 percent of the 25 highest-yielding tech stocks also outperformed the overall market.
Many high-paying stocks, including HP and IBM, have retreated in recent weeks as an increase in bond yields dimmed some of the glow from dividends. Yet it would be foolish to think that the appeal of bond-beating payouts has been snuffed out completely for the next few years.
It was huge news when Microsoft Corp. first declared a dividend in 2003. The announcement was seen as a post-dotcom-bust admission of tech's growth downshift. Today, the biggest of the big tech companies such as Apple Inc. can afford both mega-cash payouts to stockholders and mega-investments in growth-oriented research and development.
The fast-growing teenage tech companies aren't immune from investors' cash cravings, either. Bernstein Research analyst Carlos Kirjner was among the prominent voices urging Alphabet Inc., the parent company of 18-year-old Google, to pay a dividend. (Last week, he took a job at... Google.) Middle age might be coming for you next, Zuckerberg.
But one of the compromises of middle age is you can't run around like you used to when you were a young whippersnapper. And if tech companies are growing more dull and predictable like other corners of the corporate world, their valuations should reflect the new reality, too. The S&P 500 Information Technology Sector Index commands a premium multiple in terms of its price-to-sales ratio, though the valuation gap isn't as high as it was in the go-go days of the early internet.
By one measure, tech is already old and boring. Its forward price-to-earnings ratio, based on profit estimates for the next four quarters, is actually lower than the overall market's.
Falling in Line
Valuation premiums of technology companies have come down as the industry matured. Tech's forward P/E is now approximately equal to the overall market's.
Source: Bloomberg data
Not all corners of the tech world are safe for widows and orphans, of course. There's always the underlying fear that technology changes can make a longtime sure thing like Nokia or BlackBerry collapse in the blink of an eye -- and wipe out the cash for dividend payments. But the tech sector overall has entered that slow and steady stage where boring looks quite beautiful for the market's yield-starved hunters.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
To contact the authors of this story: To contact the editor responsible for this story:
Shira Ovide in New York at sovide@bloomberg.net
Michael P. Regan in New York at mregan12@bloomberg.net
Matthew Brooker at mbrooker1@bloomberg.net
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