Cisco’s Future May Hold Dividends

Cisco Systems Inc. Chief Executive John Chambers said Tuesday that the technology bellwether probably would begin paying dividends at some point in the future, a move that would please investors who are seeking some of the company’s multibillion-dollar cash hoard.

His statement at Cisco’s annual meeting in San Jose came six months after the maximum federal tax rate on dividends was cut to 15% from 38.6%, partly to encourage high-tech companies to share more of their cash with shareholders. Cisco has more than $19 billion in cash and investments.

“We will probably at some time, barring a surprise, do a dividend,” Chambers said in answering a shareholder’s question. “At the present time, we feel the cash is better used in other categories.”

Some investors began lobbying Cisco for a dividend in 2001 after the dominant maker of computers for directing Internet traffic reported its first decline in sales.

Those calls got louder in January after President Bush announced his support for ending the tax on dividends, saying that companies already are taxed once on the earnings that make dividend payments possible.

Software giant Microsoft Corp. was the first big high-tech company to commit to making dividend payments after Bush’s remarks. But Microsoft executives said their decision was motivated mainly by the resolution of some of the biggest antitrust lawsuits it faced, not by changes in federal tax policy.

Wireless phone pioneer Qualcomm Inc. followed suit in February with its first dividend, which it raised five months later. But most high-tech companies still prefer to use cash to invest in research and development and buy back shares.

Of the 20 biggest stocks in the Nasdaq 100 index -- home of the largest Nasdaq-listed tech firms -- just six pay dividends: Microsoft, Qualcomm, Intel Corp., Maxim Integrated Products Inc., Linear Technology Corp. and Paychex Inc. By contrast, 74% of the companies in the blue-chip Standard & Poor’s 500 index pay dividends.

Besides Cisco, other tech giants that had declined to initiate dividend payments include Dell Inc., Oracle Corp., Applied Materials Inc. and Nextel Communications Inc.

Chambers had said previously that Cisco’s board would consider a dividend if the tax law changed.

“I don’t see this as a huge shift,” Cisco spokeswoman Abby Smith said. “We’ve always said we’re not religious about it.”

Echoing his comments last week, when Cisco reported strong quarterly earnings growth and its biggest increase in sales in two years, Chambers said he was more optimistic than many of his peers about the state of corporate spending and the general health of the economy.

This time, he added that other CEOs would join his way of thinking.

“You can feel the business confidence changing on a global basis,” Chambers said.

Chambers said the company eventually would be rewarded for continuing to invest in new products for the telecommunications market while rivals were throwing in the towel.

Sooner or later, “there will be one network to the home for phone, television and data -- at least, this is the view I hear almost universally,” he said. “The question is how fast.”

Also at Tuesday’s meeting, Chambers said he would continue to resist the drive in Washington to force companies to record stock-option grants as an expense.

Chambers said technology companies needed broad-based option programs to be successful. Without them, he said, employees would not have as great an incentive.

And he tied the option debate to an even more contentious issue: increased outsourcing of American jobs to India, China and other low-cost countries. Requiring companies such as Cisco to record major expenses for granting options would make them seek other ways to reduce costs, and that could include additional outsourcing, Chambers said.

“If options were to be expensed at a reasonably high level, then most of our jobs will end up in Asia,” Chambers said. After low-level jobs and then managers move, he said, “it will be [entire] companies, over time.”

By wide margins, shareholders voted down proposals that would have required the board to report on how its products are used by governments to restrict the free flow of information and on the gap between Chambers’ compensation and that of the company’s lowest-paid employees.

Cisco shares rose 16 cents to $22.35 on Tuesday on Nasdaq.

Times staff writer Tom Petruno contributed to this report.