The companies that tend to pay dividends are in industries that are mature. A dividend payment is a sign that a company is no longer better off investing the cash into its own business.
Technology companies typically pay fewer dividends than utility companies. Apple (AAPL) announced this year that it would be paying a dividend of around 2%. The company made it clear it did not need such a large amount of cash. Apple realized that it could afford such a dividend.
Dell (DELL) recently announced earnings, and the stock fell more than 16%. Dell reported revenue of $14.42 billion and EPS of 43 cents per share. This is below Street estimates of $14.9 billion and 46 cents per share. Dell is concerned about PC demand due to the increased adoption of tablets.
Dell is in an extremely mature market. The PC market is also saturated by competitors, such as Hewlett-Packard (HPQ). Hewlett-Packard is experiencing the same problems as Dell; however, it is able to pay a 2.2% dividend. It's also important to note that HP's balance sheet is nowhere near as strong as Dell's. HP has about $8 billion in cash and $31 billion in debt. Dell has nearly $15 billion in cash and around $9 billion in debt.
It's not unheard of for Dell to pay a dividend. A 2% dividend would cost the company around $440 million annually. I can't imagine how Dell would be able to reinvest this cash back into the business. When Cisco (CSCO) began to see growth diminish, the company decided it was in its best interest to declare a dividend. Cisco realized its market was fairly mature and there was limited growth ahead. It's best if Dell follows in the footsteps of Cisco and starts returning capital back to shareholders.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
