Microsoft offers dividends. Will other techs follow? (First in / first out).

In January, Microsoft Corp. surprised shareholders, analysts, and other industry vendors with a late Christmas gift: dividends. Redmond announced that shareholders of record February 21 will receive a dividend of--hold on to your hat--eight cents per share on March 7. The company also announced a 2 for 1 stock split.

In some ways, the dividend is not surprising. Microsoft's legal troubles (or the most serious of them, anyway) seem to be behind it. The company recently reported surprisingly positive earnings, particularly in the current economic downturn. Microsoft also has a staggering cash reserve of more than $40 billion; the dividend will cost the company about $860 million, or less than the interest on its cash. The Bush administration recently announced a plan to eliminate taxes on dividends. And, as Redmond noted, Microsoft is the only Dow 30 company that has never paid a dividend.

But look more closely, and you'll see another reason for the dividend. For the past three years, the company's share price has been in freefall. Since hitting a high of about $120 per share in January 2000, the value of the stock has fallen to its current price of about $50 at press time. (The last split was in March 1999.) Just over the past year, the shares fell from a high of about $66 to a low of $41, though they have recently recovered slightly.

In the past, tech companies like Microsoft didn't need to pay dividends because their share prices were like the sun: Every morning, they rose. The valuations of virtually all tech companies in the 1990s rose to stratospheric heights, making dividends unnecessary. Shareholders could simply hold for a split, then wait several months for the shares to rise, then sell a few for a quick profit. For their part, companies could use their highly valued shares instead of cash for acquisitions, and either sit on their money or sink it into R&D.

For example, look at market cap giant Cisco Systems. Cisco split its stock nine times between 1991 and 2000, with prices consistently rising from a few dollars to nearly $100 per share in early 2000. (The last split was in March 2000.) During this time, the company made hundreds, perhaps thousands, of acquisitions, which boosted earnings and, hence, share price.

Now, however, things are a bit different. Most tech companies have lost billions in their market capitalizations, and their share prices have collapsed (Cisco traded at about $14 at press time). Today, new buyers of tech stocks cannot count on huge rises in share price. Without such rises, and without any dividends, where is the value in buying a tech stock? Things may turn around, of course, and we all hope they do. But it appears that the days of accelerated valuations of tech companies are behind us. Any rise today is likely to be steady and fairly slow, not exactly a selling point for those looking to make some quick cash. Tech companies have suddenly become value stocks. Who would've thought?

Microsoft's decision is likely to influence other companies, and we can expect to see at least a few of the larger techs pay small dividends. This will serve to lure buyers back to their stocks in lieu of guaranteed rises and splits. But dividends for cash cow Microsoft are easy: The company doesn't need to sink all of its earnings into R&D or acquisitions. Companies with less cash on hand may not be so lucky, and they face some stark choices. Dividends or reinvestment? Acquisitions or dividends? The day of reckoning may be near.