When is the Technology Sector, not the technology sector… and using ratios can be useful, but also misleading.
I was reading an investment review recently that discussed the Technology Sector i.e. software, hardware and networking companies, and the potential for shareholder returns via dividends. This was quite an eye-opener as the traditional view of technology companies is of volatile stocks that give exceptional returns through share price rises. Or total losses through failure. They are not normally viewed as dividend payers.
The chart accompanying the article, reproduced with sources below, implies that technology companies have significant cash resources, but low dividend payout rates. However:
- Since these charts show ratios, they may just reflect the low non-cash assets of technology companies, compared, for example, to utilities.
- The relative positioning might also be explained by the need for technology companies to maintain cash reserves to ride out the peaks and troughs of the technology business cycle. For example, semiconductor equipment manufacturers have to invest during the downturn to be ready to supply equipment in the upturn. Less conservative technology companies, with lower cash reserves, may just not survive.
- The technology companies cited here are the larger, successful survivors of several business cycles; companies such as Apple, Cisco and Oracle. Whilst still in the “Technology Sector” they are very different from a young technology start-up. Whether they should still be grouped as technology companies rather than mature engineering companies is a moot point. Engineering companies are not ‘sexy’ and yet some have historically delivered excellent returns.
Recent announcements by Apple have shown that these technology companies are now responding to pressure from shareholders and returning cash to investors. Investors don’t appreciate companies hanging on to cash unnecessarily; investors can make their own decisions to get bank deposit returns!
The underlying message is that high-level classifications and arbitrary ratios are not helpful at best, and may indeed be misleading. Read with care.