Behind the Dividend Debate

In the past few months we've seen a flurry of announcements that tech companies are paying dividends to their shareholders following record sales and earnings in their most recent financial quarters ({complink 265|Altera Corp.}, {complink 317|Analog Devices Inc.}, {complink 831|Broadcom Corp.}, {complink 2657|Intel Corp.}, {complink 3614|National Semiconductor Corp.} and {complink 5844|Tyco Electronics Ltd.} among them). I recently got a look into some of the deliberations behind the dividend decision and found them to be enlightening.

For the record, I own no stock in any of the companies in the EBN universe.

{complink 577|Avnet Inc.} recently held its annual Analysts Day and during a Q&A session an analyst asked if, following Avnet's record fiscal 2010—reaching $19. 2 billion in revenue– Avnet would be paying dividends or buying back some of its stock. The short answer was “not at this time,” and here's why: Avnet determined it could create more shareholder value by re-investing its earnings into growing the company organically and though merger and acquisition.

Avnet CEO Roy Vallee told analysts this was not a decision made exclusively in Avnet's boardroom. The company enlisted the advice of at least two outside consultants and each reached the same conclusion: Avnet would create more shareholder value by re-investing the money back into the company.

“How do we know this is the right answer?” posed Vallee. “We asked ourselves a number of questions: What is going on in the electronics market? What is the value of — and by that I mean how undervalued — Avnet's stock? Is buying back stock the best use of capital? Are we adding scale and scope every time we make an acquisition? And is Avnet's cash being used effectively?”

“Our experience has been the answer to those latter questions is 'yes'. Our track record should give you the confidence that we will do what we say,” Vallee says.

Avnet acquired three companies during fiscal 2010 — the largest of which was Bell Microproducts — that added roughly $4 billion of revenue and achieved Avnet's goal of 12.5 percent of return on capital employed (ROCE) with no additional debt or equity capital. Avnet is currently on an annualized run rate to reach $24 billion in fiscal 2011.

Vallee acknowledges that buying back stock or paying dividends would provide some short-term benefit to shareholders. “Shareholders have been asking us about paying dividends and buying back stock,” Vallee says. “It's difficult to keep everyone happy. We've decided to stay the course.”

5 comments on “Behind the Dividend Debate

  1. elctrnx_lyf
    December 17, 2010

    Barbera, this is not really surprising news from Avnet. They have lot of optimism about the market and want to invest the cash back into the market to grow in regions like Japan as you said in your previous post about Avnet. If OEM's and chip manufacturers are doing good business then no wonder Avnet will be in profits with all the orders for components.

  2. Barbara Jorgensen
    December 17, 2010

    I'm not surpirsed either, but I got the impression that anaylsts and shareholders were expecting a dividend. But Avnet has a track record of making good on its return on capital and they have M&A almost down to a science. It's a sensible position to take.

  3. Taimoor Zubar
    December 18, 2010

    It would be interesting to see the effect of Avnet's decision on its competition. While the actual reason for this decision may be something else, such a move may prove to be handy in threatening the competition and imposing company's strength on them.

  4. Ashu001
    December 21, 2010


    Answering this question of yours(Avnet's rationale behing not paying Dividends);lies in whether you put down Avent as a Growth Stock(like Amazon/Apple/Netflix,etc) where the Capital Gains are more than sufficient to compensate shareholders or a Dividend Stock like IBM/Microsoft,where the Dividends remain the only source of Income(steadily growing) for most Long-term Shareholders.

    This is not a question you have answered in sufficient depth in this post.The very fact that Avnet is acquiring companies at a rapid pace to meet its growth targets ensures that they have very little cash left on the table for Buybacks/Dividends.

    Management should always be free to choose what they think is the best option for the company(and what it does with its cash-flow).Only question that has'nt been answered in sufficent depth is When does the company become Too Big/unweildy to manage/maintain(and makes no sense to invest in for a Shareholder).In my opinion Avnet is not yet at that stage.



  5. jbond
    December 29, 2010

    Ashish – I agree with your comments about Avnets cash flow. By acquiring these companies at such a rapid pace to meet these growth targets leaves questions about how much true internal growth the company has by spending large amounts of cash to purchase these companies and create growth shows that they are not so much reinvesting internally to manufacture growth for the future.

    Until they are able to grow more internally and build up a sizeable cash flow we will not know if this company will be a growth stock or a long term payable investment.



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