In the past few years, I've continually marveled at the stunning piles of cash parked on the balance sheets of many high-tech firms. These companies had been holding lots of cash to stay strong in case industry conditions waned. But even with the sharp economic blows of 2008 and 2009, their cash piles just kept growing. They've been saving for a rainy day that's likely to never arrive.
I've also been noting how these companies could boost shares by committing much of that cash to stock buybacks. Yet software giant CA Technologies. (NYSE: CA) may have upended that theory. In late January, the company announced plans to super-size its dividend, from $0.20 a year to $1 a year. The dividend yield suddenly shot up from 1% to more than 4%.
CA can surely afford the higher dividend. The $500 million a year it now plans to spend on dividends still keeps the payout ratio, in relation to free cash flow, at around 32% (according to analyst at Evercore Partners), while the company's $1.25 billion net cash position remains intact. Whatever cash flow doesn't go toward the dividend will be used for stock buybacks and acquisitions, according to management. You have to applaud any company that takes proactive steps to utilize a strong balance sheet and reward shareholders in the process.
Shares of CA popped nearly 10% on the news, which means just one thing: Other cash-rich software firms know that any similar move to either initiate or hike a dividend will be warmly greeted by investors.