The technology sector is always evolving. That is part of its appeal. At the forefront of innovation, the sector offers powerful earnings potential although the path taken by share prices has not always been smooth.
Few need reminding of the bursting of the internet bubble in 2000 but such was the jolt to the sector that technology companies learnt to be careful with their finances – something that would stand them in good stead as the full force of the credit crisis hit in 2008.
Fast forward to today and technology companies have some of the strongest balance sheets around. Some would argue that it is possible to have too much of a good thing. With governments desperate for tax revenue and meagre wage growth providing little in the way of additional disposable income for ordinary investors, plenty of stakeholders have agitated for technology companies to distribute more of their earnings.
In March this year, Apple, the technology company behind the iPhone and iPad, responded to these calls by announcing that it would return to paying quarterly dividends, with the first $2.65 dividend paid in July. The Apple dividend could be a seminal moment for the technology sector as it could encourage other companies to release more of their earnings to shareholders.
In fact, the prospects for dividend growth within the technology sector could be strong. Technology as a sector has the highest level of cash on its balance sheet but currently pays out the lowest proportion of its earnings in dividends (the dividend payout ratio), despite earnings growth outpacing the broader market over the past five years. Taken together, this means there is plenty of room for the sector to increase its dividend payouts.
Does this mean that technology companies are set to move from being growth stocks to “sleepy” utilities? Such an outcome seems unlikely. Not least because the sector, by its nature, tends to be disruptive. For example, Nokia, the mobile phone maker, together with Research in Motion, the Canadian company behind the Blackberry mobile handset, have seen companies such as Apple and Samsung rapidly steal market share from them through more innovative and appealing devices.
For that reason, whilst we take comfort from the technology sector’s ability to generate cash, the secular growth opportunities provided by trends such as the shift to paperless payments and internet retailing, as well as the buffer provided by strong balance sheets should the economic environment deteriorate, we remain alert to the importance of stock selection.