Microsoft Corp's decision to pay its first dividend may prompt other computer-related companies to change course and dip into their cash holdings to reward shareholders, investors said.
Cisco Systems Inc, Yahoo Inc, Dell Computer Corp and Oracle Corp are among companies that may declare dividends after Microsoft's announcement, fund managers said. The world's largest software maker, with US$43 billion in cash and short-term investments, is in the best position among its peers to defy the computer industry's custom of not paying dividends in order to plow cash back into research and development or share buybacks.
"The company's generating cash at such a substantial rate that if Microsoft won't do it, you cannot expect others to follow," said Bob Rezaee, who helps manage US$7 billion at Montgomery Asset Management.
"It has to be a trendsetter," he said.
Microsoft's announcement follows US President George W. Bush's plan to eliminate the federal tax on dividends. If his proposal is approved, companies with billions of dollars in cash may be pressured by investors to follow Microsoft's lead and share their wealth through dividends, investors said.
The company said it will pay a dividend of US$0.08 a share after a stock split. Microsoft also reduced its sales forecast for the fiscal year ending in June.
Investors said the company's decision is an indication the software maker can't grow sales and profit as quickly as it has in the past. Microsoft reported average annual sales gains of 38 percent in the 1990s. In the year ended June 30, sales rose 12 percent as new initiatives have failed to compensate for slowing sales of personal computer software.
"It's an acknowledgement they can't use their capital to grow," said Bill Schaff, chief investment officer for Bay Isle Financial Corp.
"There's a lot of cash that accrues and they can't do much with it, unless they want to keep buying stuff and losing money on it," Schaff said.
Bay Isle Financial, which oversees US$1.2 billion, holds IBM shares. It sold its Microsoft shares.
Microsoft chief financial officer John Connors said this year's sales and profit will be "tough" to exceed in the company's fiscal year, which begins in July.
Computer and software companies have avoided offering dividends. The NASDAQ 100 Index, comprising the biggest NASDAQ Stock Market stocks outside of the financial industry, returned a dividend yield of 0.11 percent in the past year.
Cisco, Oracle and Microsoft are among members of the index.
By comparison, the Dow Jones Industrial Average, which includes Coca-Cola Co, AT&T Corp and 28 other stocks, provided investors with a dividend yield of 2.26 percent in the same period. Microsoft had been the only company in the Dow average that didn't pay a dividend.
"An investor might wonder why companies aren't paying a dividend now that the tax question is taken care of," said Brett Berry, who helps manage US$1.2 billion at Bailard, Biehl & Kaiser.
"It's a way of enticing a new type of investor into your stock," he said.
Berry and Rezaee both suggested that Cisco may join Microsoft in declaring a dividend.
The world's largest maker of equipment to link computers had US$21.2 billion in cash and investments as of Oct. 26, according to the company's most recent quarterly report.
Cisco spokeswoman Terry Anderson repeated what the com-pany said last week after Bush announced his plan and in November, when shareholders rejected a dividend proposal by 10 to 1.
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