Technology stocks in the Standard & Poor’s 500 index have gained about 21% so far this year, easily outperforming the broader market’s return of about 9%.
A big tailwind for the group has been Apple AAPL 1.390677311357198% Apple Inc. U.S.: Nasdaq USD157.48 2.16 1.390677311357198% /Date(1502485200240-0500)/ Volume (Delayed 15m) : 25856273 AFTER HOURS USD157.42 -0.06 -0.0381000762001524% Volume (Delayed 15m) : 403823 P/E Ratio 17.895454545454545 Market Cap 802263255038.291 Dividend Yield 1.6002032004064008% Rev. per Employee 1920430 More quote details and news » (ticker: AAPL), which is up about 38% in 2017. Its market capitalization was an astounding $819 billion recently, the biggest of any U.S. company.
What’s more, Apple is expected to pay out $2.42 a share in its current fiscal year, which ends in September—an 11% hike—and a similar increase is expected next year, to $2.66 a share. The stock was yielding 1.6% last week.
These days, larger tech companies are much more likely to offer dividends and other payouts in addition to capital appreciation. That can be good news for income-seeking investors, assuming a company’s fundamentals are sound.
“It used to be such a dirty word—dividends—when it came to growth companies,” says Richard Clode, a portfolio manager at Janus Henderson Investors who specializes in technology companies.
That’s no longer the case, as more technology company executives now view returning capital to shareholders as an important priority.
Still, tech stocks as a whole don’t have a high yield compared with other groups like utilities or telecom. The tech stocks in the S&P 500 yield about 1.4%, one of the lowest-yielding sectors and well below the broader market’s average of about 2%. Utilities yield about 3.4%.
But as the accompanying table shows, there is no shortage of tech companies with attractive yields and solid dividend-growth prospects. That certainly wasn’t the case during the tech stock boom of the late 1990s and early 2000s, when these companies, typically eschewing dividends, plowed their cash back into their growing operations.
FOR THIS COLUMN, Barron’s screened for technology companies with yields of at least 2% and 2018 dividend-growth prospects of at least 5% compared with this year’s estimates.
Of course, yields can be somewhat misleading. Case in point: IBM (IBM), which sports a 4.2% yield—the second-highest among the eight stocks included in the table and behind only Qualcomm QCOM 0.7260221627818112% Qualcomm Inc. U.S.: Nasdaq USD52.72 0.38 0.7260221627818112% /Date(1502485200385-0500)/ Volume (Delayed 15m) : 5795374 AFTER HOURS USD52.75 0.03 0.05690440060698027% Volume (Delayed 15m) : 98834 P/E Ratio 20.199233716475096 Market Cap 77329027862.1577 Dividend Yield 4.324734446130501% Rev. per Employee 740000 More quote details and news » (QCOM) at 4.3%.
IBM shares, however, have returned minus 9% in the past year, a reflection of the struggles the company has had with revenue and earnings growth. Analysts expect IBM to earn $13.82 next year, barely above this year’s forecast of $13.74, according to FactSet.
Clode says he doesn’t hold IBM, partly because “we don’t want a business that’s under a lot of pressure, particularly in an industry like tech where things can move so fast.”
To its credit—and thanks to its strong free cash flow—IBM has grown its dividend consistently. It’s expected to be around $5.85 a share this year, up more than 6% from what it paid out last year. But if the stock continues to come under pressure, it could wipe away all or part of the yield investors are getting.
Tech-company dividends could get another boost if President Donald Trump can convince Congress to pass a tax-reform package. That could include creating more favorable terms for taxing overseas cash that gets repatriated.
Chip maker Texas Instruments TXN 0.6595321055251369% Texas Instruments Inc. U.S.: Nasdaq USD80.89 0.53 0.6595321055251369% /Date(1502485200168-0500)/ Volume (Delayed 15m) : 3319693 AFTER HOURS USD80.89 % Volume (Delayed 15m) : 106451 P/E Ratio 20.42676767676768 Market Cap 79559534761.9867 Dividend Yield 2.472493509704537% Rev. per Employee 474937 More quote details and news » (TXN) has returned billions of dollars to investors in recent years via share repurchases and regular dividend increases. Analysts expect the company to pay out $2.15 a share in 2018, up 7% from $2.01 this year.
Such decisions, says Clode, are “a reflection of how management runs the business and allocates its capital.” The company has made inroads in chips for automotive and industrial clients, helping boost earnings, cash flow, and dividends.
In addition, the company has been wise with its spending on assets, typically buying manufacturing capacity opportunistically at a discount. It acquired National Semiconductor for about $6.3 billion in 2011. Texas Instruments’ yield was recently 2.4%.
Another of Clode’s holdings is Microsoft MSFT 1.526396863184428% Microsoft Corp. U.S.: Nasdaq USD72.5 1.09 1.526396863184428% /Date(1502485200378-0500)/ Volume (Delayed 15m) : 20885276 AFTER HOURS USD72.5 % Volume (Delayed 15m) : 558399 P/E Ratio 26.85185185185185 Market Cap 550017282288.492 Dividend Yield 2.1517241379310343% Rev. per Employee 720927 More quote details and news » (MSFT), which he calls “a cash-generating machine.” Microsoft is expected to pay a dividend of $1.78 a share in the 2018 calendar year, a 9% increase from $1.63 this year. (The company’s fiscal year ends in June.) The stock, which has returned nearly 30% in the past year, was yielding 2.2% late last week.
“As long as the company is generally pointed in the right direction, it’s going to throw off a lot of cash and maintain that dividend,” says Clode.
Clode doesn’t hold Intel INTC -0.7470946319867183% Intel Corp. U.S.: Nasdaq USD35.87 -0.27 -0.7470946319867183% /Date(1502485200182-0500)/ Volume (Delayed 15m) : 18215402 AFTER HOURS USD35.9 0.03 0.08363534987454697% Volume (Delayed 15m) : 1059858 P/E Ratio 13.743295019157088 Market Cap 169821857131.958 Dividend Yield 3.0387510454418734% Rev. per Employee 582179 More quote details and news » (INTC), its 3% yield notwithstanding. He notes that the chip maker faces “a lot more competition, and it’s having to spend a lot more on capex.” As a result, he’s concerned about the company’s longer-term earnings power.
Intel is expected to earn $2.99 a share this year, up 10% from $2.72 in 2016. Next year’s consensus calls for $3.09 a share, a 3.3% increase. The dividend is expected to rise a little more than 5% next year, to $1.14 a share, according to FactSet.
IN OTHER NEWS, SunTrust Banks STI -0.7621410847217299% SunTrust Banks Inc. U.S.: NYSE USD55.99 -0.43 -0.7621410847217299% /Date(1502485378466-0500)/ Volume (Delayed 15m) : 3320532 AFTER HOURS USD58.545 2.555 4.563314877656724% Volume (Delayed 15m) : 98104 P/E Ratio 14.930666666666667 Market Cap 27077988502.9248 Dividend Yield 2.8576531523486337% Rev. per Employee 386954 More quote details and news » (STI) declared a quarterly dividend of 40 cents a share, a 54% increase from 26 cents previously. Shares of the regional bank were yielding 2.8% late last week…Ingersoll-Rand (IR) announced it will increase its quarterly dividend to 45 cents a share, up 12.5% from 40 cents. The company makes air and ventilation systems. Its stock was yielding 2.1%…KLA-Tencor (KLAC) is raising its quarterly dividend by 9.3% to 59 cents a share. It was 54 cents previously. The stock’s yield was 2.6%…Another industrial company, Illinois Tool Works ITW 0.6474139812322689% Illinois Tool Works Inc. U.S.: NYSE USD138.36 0.89 0.6474139812322689% /Date(1502485349836-0500)/ Volume (Delayed 15m) : 955061 AFTER HOURS USD138.5 0.14 0.1011853136744724% Volume (Delayed 15m) : 9230 P/E Ratio 22.388349514563107 Market Cap 47310161637.7551 Dividend Yield 2.2549869904596704% Rev. per Employee 279280 More quote details and news » (ITW), has declared a quarterly dividend of 78 cents a share, up 20% from 65 cents. The stock was yielding 2.3%.
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