Even companies with huge capital spending obligations have room to raise dividends. "Pfizer raises its dividend 14% [this year], and spends $7 billion on research and development," he notes.
One factor that spooked investors away from large-cap stocks is the so-called "law of large numbers," the theory that the larger a company becomes the harder it is to grow at an 8% or 10% annual rate. "Procter & Gamble says their business is scalable and they think they can be more profitable at $80 billion a year than at the current level of $50 billion," Alexander continues. "Their growth rate is 10% [or slightly higher], and that's not bad if you also get a dividend."
Nonetheless, Alexander acknowledges that investors' expectations still suffer some lingering effects from the 1990s bubble. "They are looking for the next new thing, and we don't think there are that many opportunities," he says.
Like others, Rob Arnott, manager of the PIMCO All-Asset Fund, was amazed when many of the excesses that were on display in the late 1990s returned in 2003, albeit in a muted, milder fashion, as tech stocks grabbed the leadership position in the recent mini-bull market, only to give most of their gains back in the last few months. One issue that illuminates the predicament technology companies face is the brouhaha over expensing stock options.
"I'm in favor of stock options because I think they are a great way to align the interests of shareholders and managements. But they are an expense," Arnott declares. "Technology companies would like to pretend that stock options are free because, if they are expensed, it would wipe out almost 100% of most tech companies' earnings. The emperor has no clothes. On the other hand, if they were expenses, they would only reduce about 10% of the earnings at other companies." That is one reason why Arnott believes a shift toward value will pay off in a market where opportunities are likely to be limited for an extended period.
Golub, of JP Morgan Fleming, is equally unenthusiastic about tech stocks. "The only technology that is a growth area is the current technology," he observes. "The assumption on Wall Street is that whatever is hot will always be hot. But look at all the great inventions over the last century-farm equipment, electrical appliances, cars, planes and television sets. They are all value sectors today."
Indeed, Golub thinks only one growth industry is a perpetual growth business-health care. "Everybody wants to live longer," he declares, adding that he doesn't know which health care sectors, including Big Pharma, will be tomorrow's darlings.
One advantage some large multinational companies enjoy is a dominant brand and market position. "If they have a brand and superior technology to retain their advantage in a rapidly changing market" they can often erect major barriers to entry, explains Bill Wilby, head of equities at OppenheimerFunds.
Another critical factor contributing to a company's success is management. But Wilby cautions that investors can sometimes assign too much weight to it. Studies have shown that when a rock-star type of CEO who has had a phenomenal track record at one company moves on, he often comes up short in his next position.
In some industries, the human capital that really counts resides several levels below the CEO. Take a pharmaceutical company like Johnson & Johnson. "They have great management, but to own a large drug stock you have to believe in the [new drug] pipeline," Wilby says. "And J&J doesn't have a great pipeline." Instead, he thinks Novartis and Roche have pipelines providing them with much greater growth potential.