Should Tech Companies Pay Dividends?

from the misuse-of-fiscal-policy dept

It’s being reported widely that the Bush administration is planning on trying to stimulate the economy by removing income taxes on dividend payments. Many think that this could cause technology companies (which, historically, have stayed away from paying dividends) to open up their checkbooks. The economic theory from the administration seems to be that without the income tax component, more companies will be willing to pay larger dividends, passing more money into shareholders hands, which will then somehow boost the economy (which they apparently consider to be the equivalent of the stock market). It will also encourage more people to invest in the stock market – since they could (conceivably) get more money back in dividends. This seems to be fairly backwards thinking. As Kevin Werbach points out, the reason technology companies usually don’t pay dividends is they believe they can invest that money better than their shareholders. If we take a step back you can see why this is probably a bad idea. Economic growth comes from productivity increases, which are fueled by technology advances. When technology companies are encouraged to pay out dividends instead of investing it in new opportunities, we’re encouraging consumer spending over productivity enhancements. It seems like a short-term strategy that does little to help long-term economic growth.

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Comments on “Should Tech Companies Pay Dividends?”

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ScooterBoy says:

presidents are always short sighted

Ahh… but aren’t presidents _always_ short sighted? With Bush’s reelection campaign right around the corner in 2004, he’s not really looking to help long-term economic growth.. it’s difficult for any president in his first term to enact any long-term policies, especially if they’re at the expense of the short-term (which in many cases, they are…)

Matt says:

Tech companies don't always re-invest that money

Pushing aside the argument of whether or not the concept of taxless dividends will spur tech companies to start paying out dividends, I’d like to make one comment about the post’s theory of tech company reinvestment. Most tech companies that have substantial profits (let’s use Microsoft as the most famous example) aren’t actively reinvesting all of their profits back into technology. It’s been widely reported (perhaps incorectly?) that MS has between $36 and $40 billion dollars in the bank and that they’re adding to that by another billion every couple of months.

These monies are profits which come _after_ expenses such as R&D, investments, buyouts of smaller companies, etc. These monies are doing nothing but drawing interest (bank interest, bond interest, probably stock value increases, etc) for MS’ own interests. They’re not being used to increase productivity, develop new products, or push the limits of technology.

I really do think that at least a portion of these profits have to be returned to the investors, or else we run the risk of having the stock market go from partial _ownership_ of a company to a purely speculative arena where future stock price increases are the investor’s only incentive to buy a company stock. In that event, you may as well relocate the NYSE to Las Vegas, because it’s all about gambling at that point.

Gene Hoffman (user link) says:

Not so short sighted

Look, Tech companies may very well be able to retain cash and grow using that cash at a faster rate than shareholders can make interest on the money, but there is a large class of companies that are NOT tech companies.

The reality is that the policy shift toward removing the dis-incentive to pay dividends will allow companies like Enron to be succseful energy or other commodity companies that pay strong dividends, but don’t grow significantly because they are a commodity business. Thus, these companies valuations will be competitive with Tech companies because they are economically sound – just not growing.

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