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Cisco Systems says it will start paying cash dividends

September 14, 2010 | 11:42 am

U.S. technology giants seem to be heeding Wall Street pressure to funnel some of their cash hoards to shareholders.

Computer networking titan Cisco Systems said Tuesday it expects to start paying a dividend for the first time. Investors liked the sound of that: Cisco’s shares were up 45 cents, or 2.1%, to $21.71 at about 11:30 a.m. PDT.

The announcement follows a report that Microsoft Corp. was considering borrowing in the bond market to fund new stock buybacks and a dividend boost. That report helped send Microsoft shares up $1.26, or 5.3%, to $25.11 on Monday.

Stock buybacks have long been the tech industry’s favorite use of excess cash. But with many investors starved for income as interest rates have plunged over the last two years, rising dividends have the potential to help fill the gap.

Ciscohq Silicon Valley has plenty of cash on hand, if it wants to share. Cisco held nearly $40 billion in cash and short-term securities as of July 31. Microsoft’s stash at mid-year was nearly $37 billion.

Cisco Chief Executive John Chambers, speaking at an analyst conference in San Jose, Calif., on Tuesday, said the company decided to initiate a dividend in the current fiscal year, which ends next July. He said Cisco was looking at providing an annualized  yield of 1% to 2% -- not much, except considering that five-year U.S. Treasury notes yield just 1.43%.

At Cisco’s current stock price an annual dividend of 22 cents a share would equate to a 1% yield.

Among other tech titans, Oracle Corp.’s current dividend yield is 0.8%, Hewlett-Packard Co.’s is 0.8%, Microsoft’s is 2.1% and Intel Corp.’s is 3.4%. Other Silicon Valley giants, including Apple Inc. and EBay Inc., have resisted paying dividends.

For many companies the dividend issue is clouded by uncertainty over federal tax policy. Dividends now are taxed at a maximum rate of 15%. But they’ll be taxed at ordinary income tax rates starting Jan. 1 unless Congress extends the Bush administration’s expiring 2001 and 2003 tax cuts.

Cisco indicated that its dividend decision would depend on what happens with the tax rate and on whether the government changes its policy on repatriation of cash that U.S. firms hold abroad. As the law now stands companies must pay corporate income tax on money they bring back to the U.S.

Microsoft is considering borrowing via bonds to fund a bigger dividend rather than repatriate funds and take that tax hit, according to Bloomberg News.

-- Tom Petruno

Photo: Cisco's headquarters in San Jose. Credit: Robert Galbraith / Reuters