5 Tech Giants Likely to Follow Cisco's Dividend (CSCO, MSFT, INTC, AAPL, DELL, HPQ, WDC, STX, EBAY, AMZN, EMC, VMW)

You probably already know now that Cisco Systems Inc. (NASDAQ: CSCO) has promised to pay a dividend of 1.5 to 2% initially for 2011.

After a multi-year period of dead performance, this was a long-overdue. After all, the billions of shares it repurchased just kept its shares from getting diluted after dozens of acquisitions and as a result of the endless stock options that made employees millionaires over the last fifteen years.

The market did react favorably at first with gains of 3%, but the end of day selling on Tuesday took shares down to where there was just a 0.89% gain to $21.45.  Still, volume was double normal and ended up with more than 100 million shares trading hands.  Most importantly, Cisco is not even catching the top of a cycle as its 52-week trading range is $19.82 to $27.74.

The big thing to consider is simple: Cisco just joined Microsoft Corp. (NASDAQ: MSFT) with its 2.2% yield and Intel Corp. (NASDAQ: INTC) with its sharp 3.5% yield.  That is what having gross margins in the 60% range allows.  Now the question boils down to who is next among the technology giants to pay a dividend? After breaking out the technology titans, we have five dividend candidates in technology.

1. Apple.

Let’s go ahead and get Steve Jobs and Apple Inc. (NASDAQ: AAPL) out of the way first.  The company is not the most likely of the five runner-up dividend payers.  That is because Steve Jobs is a CEO that can tell anyone in the country to mind their own business, and he’s already said he does not want to pay a dividend yet.  Last quarter it added $4 billion cash on record revenue of $15.7 billion and net quarterly profit of $3.25 billion, although gross margin was lower at 39.1%.  All in all, cash and investments was over $45 billion, or nearly $50 per share in cash based on the 913.48 million shares issued (with 1.8 billion authorized).  It could easily pay a 10% one-time dividend, offer up 30% of income for dividends initially, and it could even announce a four for one share stock split to make shares more attractive to younger investors.

2. Dell, Inc.

Dell Inc. (NASDAQ: DELL) is another company that could easily pay a dividend, and odds are growing that it will.  It isn’t exactly like the PC business is growing at the same rate as it was in the 1990’s. That stands, Even if Dell is intent on paying up for bolt-on acquisitions.  Michael Dell would be very hard to fire, but his popularity is far from where it once was.  Dell wants to still compete against H-P for relevance in a post-PC world of tech, and H-P has a paltry 0.8% dividend yield even after its shares have lost nearly 30% from this year’s highs.  Its market cap is only $24 billion now and at July 30 its cash and investments came to nearly $14 billion.  Dell could pay out $1.50 per share one-time dividend rather easily, and it would still have enough cash to pay an ongoing $0.10 quarterly dividend per quarter and have billions to make bolt-on acquisitions to compete against both H-P and against Cisco in the data center.

3. Western Digital Corp.

Western Digital Corp. (NYSE: WDC) is still growing in the storage space despite all of the competition and margin compression that the sector faces now that a 1 Terabyte can be had for close to $100.00.  The company is a winner in Apple store sales as the leading external drive there.  The market cap is $6.1 billion at $26.69, it has $2.7+ billion in cash, and it has a tangible book value of $4.475 billion.  The problem is that it has no dividend and claims to not want one; the annual report says: “We have not paid any cash dividends on our common stock and do not intend to pay any cash dividends on common stock in the foreseeable future.”  The balance sheet is far less leveraged than rival Seagate Technology (NASDAQ: STX) and so far the demand for Terabyte-sized storage devices seems insatiable as movies, videos, music and on and on pack up storage devices.  It is unlikely, but WDC could take on more debt, pay out $5.00 per share, and still be less leveraged than Seagate.  At $26.69, its 52-week range is $23.06 to $47.44, and Thomson Reuters has estimates of $3.91 EPS and $9.89 billion revenues in June-2011 and $4.58 EPS and $10.68 billion in revenues in June-2012.  If this remains stable, WDC could pay a 5% yield if it chooses to.

4. eBay, Inc.

eBay Inc. (NASDAQ: EBAY) is now an Internet value stock.  Yep, value.  At $24.25, Thomson Reuters has $1.62 EPS and $1.78 EPS for 2010 and 2011, respectively.  We are late enough in the year that we are now blending 2010 and 2011 estimates for a blended forward multiple: so it trades at 14-times forward blended earnings.  It has a high market cap for its auction monopoly of $31.8 billion, and it has nearly $6.7 billion in cash and investments.  The net tangible assets are $7.6 billion, even if its shareholder equity is $14.1 billion.  This issue is simple enough though – its leadership is as set as it can get, and only Amazon.com inc. (NASDAQ: AMZN) can compete with used sales items.  After that, sorry, but the competition is garage sales, flea markets, and thrift shops.  eBay won.  If the company began paying out 40% of its income it would have a yield of about 1.75%.  That assumes no leverage via debt offering nor from buybacks.

5. EMC Corporation

EMC Corporation (NYSE: EMC) is the non-dividend elephant in the room that everyone wants to ignore and not pick on.  This is the insatiable storage demand leader.  At $20.58, the company has market cap of over $42 billion and it has over $10 billion in cash and investments on the books with a net tangible assets after all items of $5.6 billion.  The wild card is the VMware Inc. (NYSE: VMW) ownership that is still what we just round off to 80% – which would be worth $28 billion if all of that value could be unlocked at current market values (an unlikely case for VMware, particularly with its high-beta and high valuations).  We rate EMC as a maybe per its annual report comments: “EMC has never paid a cash dividend. While subject to periodic review, the current policy of EMC’s Board is to retain all earnings primarily to provide funds for the continued growth of the company.”  Still, EMC has so many avenues to unlock value.  Thomson Reuters has estimates of $1.21 EPS for 2010 and $1.39 EPS for 2011, and a 40% income payout would generate a yield of about 2.5% today before it divests a penny of VMware or adds leverage.

Cisco was likely, or even hopefully, just the start of technology companies paying dividends.  Now all 30 DJIA components pay a dividend or will when Cisco starts.  The trick here is that technology is not just an endless growth phenomena that can trick investors with all the disparity between GAAP and non-GAAP earnings and just give investors upside exposure to the growth of the businesses.  We are entering the post-PC tech era, and tech companies are going to have to begin treating their shareholders just like other strong economic sectors.

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JON C. OGG