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By Jeremy Glaser and Grady Burkett, CFA | 05-01-2013 09:00 AM

Tech Firms Look for Ways to Use All That Cash

This quarter's distributions to shareholders are not a flash in the pan, says Morningstar's Grady Burkett.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. First-quarter tech earnings have been coming in fairly soft. I'm here today with Grady Burkett; he is our tech strategist at Morningstar. We're going to look at some of the drivers of this weakness and his best picks in the sector. Grady, thanks for joining me.

Grady Burkett: Thanks for having me, Jeremy.

Glaser: So let's start with the kind of two big things: capital allocation and PC sales. Let's start with capital allocation. The big announcement is from Apple, this $100 billion plan to return cash to shareholders in the next couple of years. Is this a trend across a lot of different tech companies, or is this more idiosyncratic and related to issues that happened at Apple?

Burkett: This is one of the more interesting stories in tech this quarter, and we discussed it last quarter, you and I did, about these cash balances these tech firms are maintaining. The cash balances continue to grow. The largest tech firms that we cover had about $280 billion in cash this quarter on the balance sheet, net cash. So we've seen a lot of these companies start to redistribute that cash to shareholders in the form of buybacks and dividends. Apple is obviously the most visible example, but we've seen it across the sector.

If you look at companies like Corning, they authorized a new share-repurchase program and raised their dividend. IBM just announced a new $5 billion share-repurchase authorization; they increased their dividend. Cisco Systems increased their dividend 21%. So really what we're seeing from these companies is their revenue growth is slowing and their cash balances continue to grow because they're very competitively well-positioned to generate lots of cash. They're increasingly distributing that to shareholders.

It's certainly something specific to the quarter where we're seeing this. We think there's legs to this trend, because the payout ratios are so low for a lot of these large companies and the cash balances are still really high. So we think that this can continue for multiple years, not just multiple quarters.

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