ClearBridge Advisor sees technology dividend uplift
Legg Mason subsidiary ClearBridge Advisor believes that dividends from technology companies are set to rise, following the news of US software firm Micrisoft increasing its own payou by 15%.
Peter Vanderlee, co-manager of the Legg Mason US Equity Income Fund, said this is likely to make the sector more attractive to investors looking for yield at a time when income from other assets such as US Treasuries and corporate bonds is under pressure.
Instead, Vanderlee sees many technology firms maturing to the stage whereby they are set to return more cash to shareholders.
“Many of these companies’ balance sheets are flush with cash with little to no debt, while free cashflow remains abundant and payout ratios are still conservative.That means that despite the recent trend of more meaningful dividends out of technology companies, there is still a long way to go.”
ClearBridge data suggests that three technology companies have initiated a dividend in the S&P 500 this year, while 38 US tech stocks have raised the dividend level in the last 12 months.
Just 20% of technology businesses in the S&P 500 paid a dividend in 2002, but 53.5% were paying one by the end of last year.
“Management teams and directors of technology companies are increasingly looking at dividends as a way to attract new investors, namely those focused on value and income, and diversify their shareholder base,” Vanderlee said.
“The inclusion of dividends in their capital allocation framework represents a departure from the traditional vectors of share buybacks and acquisitions. This change in behavior is further supported by the tendency of stock prices to respond favourably on announcements of significant dividend initiations and increases.”
Vanderlee said that when Cisco, the data network equipment maker, announced an increase in its dividend by 75% on 15 August 2012, it saw a surge in its share price.
Other examples include Apple, which initiated a dividend in August 2012, and Seagate, the hard drive maker, which increased its dividend twice over the past year.
“We fully expect this trend of technology companies paying higher dividends to continue,” said Vanderlee.