Technology stocks have been the growth sector of the stock market ever since the Great Bull Market began in 1982. It was cemented with the Internet Boom of the 1990�s as great value was created by the stocks. But the NASDAQ Composite has been true to the pattern of the Japanese stock market and 12 years after the NASDAQ hit 5,000 it remains barely over half of that level even as the S&P 500 and Dow Jones Industrials remain within striking distance of all-time historic highs. Because of their high-beta nature, technology investors have traditionally paid huge premium valuations for the shares and eschewed dividends.
But with the overall stock market flat over the last 12 years and with most technology stocks still a fraction of their 1999-2000 peaks, many technology companies have recently begun to pay dividends. Intel, Cisco System, and Microsoft are among the Tech Titans who have initiated dividends in recent years. Stock buybacks have been the preferred method of capital management for technology companies as they offset the generous stock compensation awarded to executives and employees. Unlike dividends, buybacks can be suspended or delayed quite easily if the company needs to conserve cash during a market or economic upheaval like 2008-09. But more and more analysts and investors are clamoring for the yield support that dividends provide, and the paying of the dividend opens up technology stocks to a whole new universe of potential buyers: value investors. Here are 5 technology companies currently paying a dividend 50% greater than the yield on the 10-year Treasury bond with 1 important asterisk attached to one of the names:
Microchip Technology (MCHP, $36) is the highest-yielding semiconductor stock. The company has great management and has executed well in its niche of the technology arena, avoiding blowups. Microchip Technology specializes in putting chips into formerly chip-less consumer and industrial products like appliances, autos, and medical instruments. Their 16-bit controller business is growing market share and they are starting to expand into the nascent 32-bit lineup. The company has been on the acquisition trail in recent years, but nothing appears on the horizon so any dilutive M&A risks appear nil. However, 2012-13 will be challenging for MCHP to outgrow other tech companies since Microchip lacks smartphone and networking exposure. At a calendar year (CY) 18x P/E Microchip Technology trades at a premium to the semiconductor average of about 16x, and this is a concern going forward. But any dip in the market or technology stocks (or MCHP-specific weakness) should be viewed as a buying opportunity. MCHP yields 3.9% and the payout ratio is 75% so keep an eye on the earnings and cash flow since the company has less financial flexibility than other companies to maintain or grow the dividend.
Maxim Integrated Products (MXIM, $26) produces a range of analog chips and circuits for industrial, automotive, wireless, and wireline applications. Speculation is that Maxim has a design win for the 2012 release of the iPhone 5 which will not only drive the top and bottom lines but also attract money flows into the stock from �Applephiles� who look down the supply chain to existing and future Apple component suppliers. Maxim has many analog competitors, notably Texas Instruments, and competition and price-cutting from deeper-pocketed rivals can impact margins in any given quarter. Business can tend to be concentrated with a few companies, and if you are unfortunate to be supplying a company on the losing end of market share � such as Nokia � you can find yourself in a heap of trouble very quickly. Fortunately, Maxim�s biggest customer is Samsung which has excellent market share in both the U.S. and globally. A win with Apple would cement Maxim�s hold in both the Apple and Android universes. Maxim trades at 14x CY 2012 EPS and yields 3.6% on its relatively safe payout ratio of about 55%.
Intel Corporation (INTC, $25) is the IBM or ExxonMobil of the technology dividend payers, a steady, large-cap that won�t surprise too much to the upside or downside. Intel was one of the first technology companies to pay a dividend. The dominant microprocessor company in the world, the company has no real competition aside from Advanced Micro Devices (AMD) and changing consumer tastes. Those tastes have lately included a preference for tablet PCs like Apple�s iPad, allowing for design wins for smaller, nimbler companies like Arm Holdings and Nvidia. But Intel possesses a most potent R&D pipeline, deep pockets, and world-class engineering abilities. PCs are not going away and Intel�s 2nd generation i7 Sandybridge line (such as the i7-2600k) has held pricing and is getting rave reviews from technophiles. Intel yields 3.3% at current levels and the payout is less than 40% of Intel�s expected 2012 and 2013 earnings. The balance-sheet is a fortress with plenty of cash and short-term investments and minimal debt which would allow Intel to ride out any domestic, global, or technology slump and maintain the payout.
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Seagate Technology (STX, $18) is the 2nd largest global supplier of hard disk-drives (HDD). For years, overcapacity and extreme boom-bust cycles made the sector one of the most destructive of shareholder value along with the DRAM sector. Industry consolidation, more rational pricing, and the ending of Asian government subsidies to irrational competitors have resulted in more manageable oligopolistic pricing. HDD�s are still the most cost-effective way to store large amounts of business and consumer data and video, as solid-state drives remain relatively expensive despite their performance advantages. Seagate yields 4.0% and the payout ratio is a super-low 15% of consensus 2012 earnings. The Thai flooding has resulted in estimate bumps for Seagate but even the 2014 normalized earnings level would only result in a 25% payout ratio. Net-net, there is a lot of cushion to protect the dividend in the out years, even in the hyper-volatile world of HDD pricing and volumes.
Apple* (APPL, $422) �Hey, when did Apple start paying a dividend ?� Settle down, settle down ! Apple does not pay a dividend � yet. But I believe Apple will � must � announce one in 2012. The company is simply generating too much cash and unless they are going to do a large merger, initiate a mega-stock buyback, or bail out a European country or two, there is nothing else for them to do with that much cash. Apple could find itself with $100 billion in cash within a few months. The late Steve Jobs was against paying dividends, but that was a mindset of a much smaller and less profitable Apple; even Jobs would be hard-pressed to keep building up a ridiculous cash cushion that makes no strategic sense. Having maxxed out on growth and technology investors, the only remaining large, new purchasers of Apple stock are value investors who want to see a cash dividend. For simplicity sake, let us assume the oft-mentioned 10:1 stock split: on a post-split basis, Apple would have almost $9 per share on the balance sheet (not all of it in the U.S.) and is generating free cash flow at the conservative rate of $4 per share per year. If Apple pays out $2 per share post-split, the yield on the shares approaches 4.5% and Apple still has plenty of cash on the balance sheet and a killer lineup (iPod, iPad, iPhone, and coming soon, AppleTV) that would generate $25 billion in cash each year. Apple had near-death experiences in the past, but that was a much smaller, weaker Apple always playing catch-up in the PC arena. Apple is the leader in most of its consumer markets. Consumer tastes do change, but the best analogy might be to Sony (radios, TVs, Walkmans) which stayed on top for 25-30 years before losing its way. Apple�s dominance has only existed for less than 10 years. With the shares trading at only 12x CY 2012 EPS (9x ex-cash), Apple could probably afford a $2.50 post-split dividend representing a payout of about 60% of 2012-13 cash flows. Even if Apple earnings stagnate or fall, the payout has a cushion and besides there is the $80 billion (and growing) cash hoard to dip into which easily tides the company over. A 4-5% dividend yield on the current or split Apple shares would not only attract a wave of new Apple shareholders, it would probably be a market-moving event as well.
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Dividends can be cut, but most companies which pay them do not like to cut them once they are initiated. They realize that investors assume the current payouts will continue in the future. Of course, economic or industry conditions can change and any company will conserve cash during upheavals like 2008-09. With plenty of free cash flow and strong balance sheets, the companies listed above, despite being in a very volatile industry with high operating leverage, would seem to be able to weather all but the most extreme technology slumps.
Intel and Apple are represented in a number of ETFs, given their technology bent and size of their market caps. The Technology Select Sector SPDR (XLK, $26) has Apple as the top holding with a 15% weight and Intel ranking 7th with a 4% share; the ETF yields 1.5%. Be aware that Apple has an outsized weight in most technology ETFs given the outperformance of the shares the last few years. The PowerShares Dynamic Technology (PTF, $23.50) is much smaller and less liquid than the XLK. It has Seagate as its second-largest holding with a 2.56% position and Intel ranks fifth with a 2.49% weighting. The Powershares ETF is very well-diversified with the Top 10 holdings only accounting for about 25% of the funds assets.
Complete Holdings of XLK
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