In Translation

Why Tech Firms

Avoid Dividends

By REBECCA BUCKMAN

Staff Reporter of THE WALL STREET JOURNAL

Shareholders generally love stock dividends. But many technology companies avoid those quarterly payouts like the plague -- despite having plenty of cash to pay them.

Case in point: Microsoft, which as of Sept. 30 had an astounding $36 billion in cash and short-term investments on hand. Still, Microsoft, along with firms such as Cisco and Oracle, has never paid a dividend.

Microsoft's reluctance to dole out cash to shareholders was criticized last week by consumer activist Ralph Nader, who wrote a letter to Microsoft Chairman Bill Gates charging that the policy protects the company and its largest shareholders from paying higher taxes.

That may be partly true, but there's also the question of image. Many tech titans worry that issuing cash to shareholders will brand them as stodgy and old-fashioned, instead of nimble and fast-growing.

"Tech companies are fearful that by announcing a dividend, they are signaling slower growth prospects," writes Steve Milunovich, Merrill Lynch's top technology strategist, in a recent research piece.

Tech firms know that dividends traditionally have been a reward for holding more conservative stocks like General Motors or International Business Machines. Shareholders of firms such as Microsoft, on the other hand, expect better growth as a payoff for holding a riskier stock.

Many tech companies, then, plow excess cash back into research and development to make their businesses grow. They also use excess cash to buy back stock, which is a tax-efficient way to reward shareholders. That's because the per-share price generally rises, increasing shareholder value, whereas dividends are taxed as ordinary income.

But companies such as Microsoft have built up so much excess cash that they can spend heavily on R&D and buybacks and still have money left over, some argue. And, they're not growing as fast as they used to -- meaning they may need to pay a dividend to attract a new class of investors if shareholders grow restless with less-than-stellar growth.

A Microsoft spokeswoman says the company has considered issuing a dividend from time to time, but prefers to reinvest its cash into its businesses and buy back shares to offset the effects of its employee stock-option program.

Write to Rebecca Buckman at rebecca.buckman@wsj.com