If More Techies Sneeze, Industry Might Catch Cold

Technology stock investors decided Tuesday that three is definitely a crowd.

After five weeks of strong gains, the tech sector was hammered for steep losses after disk drive maker Seagate Technology and computer networker Cabletron Systems separately warned that near-term earnings will be lower than expected.

Those announcements, issued late Monday, followed Intel’s warning Friday that its computer chip sales so far this quarter are running below expectations. It forecast a 5% to 10% decline in total sales from the first-quarter level.

What’s more, Intel didn’t help matters on Tuesday: At a meeting with analysts in New York, the company sounded more cautious about business than some analysts had hoped. Chairman Andrew Grove, in a breakfast meeting with reporters, repeated that Intel must navigate a “monumental” product transition this year from its older 486 and Pentium chips--the brains of most of the world’s personal computers--to its new generation of faster Pentium II and MMX chips.

Product-transition issues are, in fact, dogging many tech firms this year and contributed to the pounding the stocks took in February and March.

For Intel, the concern is that sales and earnings will be under increasing pressure if customers’ purchases of older chips slow at a faster rate than purchases of newer chips rise. That concern has been magnified by Intel’s admission that it currently doesn’t have the capacity to make enough new chips to satisfy demand.

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In the computer-networking business, many potential corporate buyers are sitting on their hands, unable to decide which of the myriad new competing technologies for linking computers is the smartest choice. “The customer base is confused because there are a lot of new products,” says Michael Murphy, editor of the California Technology Stock letter in Half Moon Bay, Calif.

In the disk drive sector, Seagate has been hurt as certain competitors’ products in the high-end data storage business have gained market share at Seagate’s expense.

But product transitions are always an issue in the fast-evolving tech business. Wall Street knows that and generally isn’t terribly troubled by the idea that customers may be in a temporary holding pattern or that a company like Intel temporarily has capacity problems.

The far bigger worry is that Intel, Seagate and Cabletron--major names in their respective industries--may be seeing the early signs of a sustained slowdown in fundamental demand for computer equipment, after years of dramatic growth.

Where’s the evidence of that? So far, there isn’t much, at least not in the United States. But both Cabletron and Intel, in signaling weaker near-term results, cited surprisingly anemic demand in Europe in recent months.

Intel told analysts Tuesday that “we don’t understand what’s going on in Europe,” spokesman Howard High said. In other words, the company isn’t sure whether weaker European sales are related to product transition or to the start of a sharp decline in personal computer demand.

As for the United States, however, High said Intel has seen no falloff in demand. “The U.S. is trending OK” for chip demand, he said. That has been reinforced by leading personal computer makers in recent weeks: Their reports of robust first-quarter sales and earnings helped spark the rebound in tech shares in late April and May.

Problems at Intel, Cabletron and Seagate may well be company-specific. Even so, history suggests it won’t take many more such announcements to spark another broad tech stock plunge.

Corporate Cheapskates? Companies have suddenly become less willing to share earnings with stockholders in the form of higher dividends--one more thing to worry nervous market bulls.

Standard & Poor’s Corp. reports that the number of companies raising dividend payments in May totaled 178, down 24% from 233 in May 1996 and the largest year-over-year decline since January 1991. More significant, that leaves the year-to-date total for dividend increases at 1,011, down from 1,022 in the same period of 1996, interrupting the strong up-trend in place since 1991.

Why the sudden drop in dividend generosity? Arnold Kaufman, editor of S&P;’s Outlook newsletter, notes that more companies may be opting to return capital to shareholders by buying back stock instead of raising dividends. Even so, with the average blue-chip stock’s dividend yield at a record low of 1.8%, Kaufman says he isn’t encouraged by the idea that dividends might get even thinner while stock prices march ever higher.

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Stingier Companies?

The number of companies raising dividend payments so far this year is trailing the total in the first five months of 1996, halting the strong uptrend in dividend increases since 1991. Number of increases in the first five months of each year:

1997: 1,011

Source: Standard & Poor’s Corp.