Friday, April 3, 2009

Should RIM Issue Dividends? The Case For and Against

I've noticed that a lot of traffic directed to my site from search engines is from people searching RIM and dividend. I thought that raised an interesting question and I think it warrants a quick analysis.

The Case For Dividends

Although RIM is a technology company, it's hardly some new up-start. They have a strong product development line in hardware (regular planned obsolescence), their software and data models are profitable and inimitable (from an mobility and security perspective) and their company appears to have a long run way. They are very mature in this space.

However, very few (if any) companies in the technology space issue dividends. Why? Growth in this industry is still pretty rapid and companies are using their cash for R&D. Plus they don't have to. Investor's are happy with the capital gains returns from the stock movement based on the long term potential.

By issuing dividends, RIM could signal to the market that it is a mature leader in the technology space. This would attract a new type of investor to their stock, and signal that RIM is a stable company. This type of move should prevent gigantic drops to $44 that we saw earlier last month.

The Case Against

RIM's growth and cash base is still so tremendous (new subscriber base is constantly growing) that issuing a dividend would have some negative effects on investors perceptions. "Maturity" in a market place isn't always something to brag about, especially in RIM's case where a huge portion of their price (if not all of it) is based on the fact that they are growing (enjoying high PE multiples).

Also, investors should ask themselves: "After all that trouble to raise capital, you're giving it back to us?"

Plus, in this recessionary environment where cash is king, RIM should be using the money (at the very least) to acquire companies such as Certicom inexpensively to bolster their strategic offering.


If you look at the math formulas for dividend payout versus retention ratio, based on RIM's growth it doesn't make sense to pay out dividends (thus reducing the retention ratio) because they still have a tremendous growth rate and they need the cash to fuel it.

I think it would *eventually* be a good idea for RIM to issue dividends: 5 to 10 years out. Probably starting with a one-time dividend approved by their board and slowly moving towards a regularly quarterly dividend (but that is more than a decade out).

But who knows? With the pace and development of our economy and technology, wireless data is becoming as common and stable as McDonald's hamburgers.

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