by Marc Bastow | January 14, 2013 6:15 am
BIG TECH IS DEAD!
OK. Now that I have your attention … Big Tech isn’t really dead — it’s just trying to find some momentum. It seems like ages ago that Apple (NASDAQ:AAPL) carried a $700 price tag, and Microsoft (NASDAQ:MSFT) and IBM (NYSE:IBM) have been flat for months.
However, the healthy dividends parceled out by a number of the sector’s biggest names help make such periods of low performance just a little easier to swallow.
Specifically, for long-term productivity, I like the aforementioned Microsoft, which yields 3.5%, as well as Intel (NASDAQ:INTC, 4.1%) and Cisco (NASDAQ:CSCO, 2.8%). I also like IBM — yes, its current 1.7% dividend isn’t too impressive and puts it neck-and-neck with the 10-year T-note, but I can’t ignore where it’s increasingly putting its cash.
These stocks are all leaders in their respective fields — software, chip manufacturing, IP networking, and IT servicing — which bodes well for their longevity. (Being in first doesn’t mean you’ll end in first, but it’s a leg up on everyone else!)
All four also are pretty decently valued on a price-to-earnings basis. Intel is the cheapest at a 9.5 P/E; CSCO clocks in at 13; and IBM and Microsoft hover around 14.
More importantly (as far as our retirement portfolios are concerned), all four have steadily increased dividends over the past few years:
Since 2010, that comes out to 43% dividend growth for Intel, 54% in IBM and 76% for Microsoft. CSCO didn’t even have a dividend until 2011, when it made a 6-cent payout — and since then, that quarterly check has gotten 133% bigger!
Microsoft, Intel and Cisco admittedly have ranged between slight annual gains and slight annual losses during that time, so those ballooning payouts have turned into increasingly attractive yields for more recent buyers.
But again … IBM is hovering around a not-so-stellar 1.8%. So what makes it such a good long-term retirement play?
While the other three have been sweetening the kitty for shareholders displeased with lackluster price appreciation, IBM has been sprinting just to keep up with its roaring stock (at 50% gains in three years, it’s lapping the others).
Considering the company’s longstanding history of payouts (since 1916) and its willingness to keep throwing more cash at shareholders, it seems a pretty good bet those payouts will keep climbing — whether it’s to match shares that keep rising, or to placate shareholders because shares stay sideways. And given IBM’s ability to continuously stay relevant in tech for more than a century, I’m not worried about that ugly third direction.
More good news for shareholders of IBM and the rest of these stocks: Each sits on piles of cash and short-term investments, and each generates gobs of free cash flow — you know, the stuff that fuels those dividend hikes and share buybacks.
|Name||Cash and short-term
|Free Cash flow||Total available|
|MSFT||$66.6 billion||$7.9 billion||$74.4 billion|
|CSCO||$45.7 billion||$2.2 billion||$47.9 billion|
|IBM||$12.2 billion||$3.6 billion||$15.8 billion|
|INTC||$10.4 billion||$2.2 billion||$12.6 billion|
However, amid all of this cheerleading, I’d be remiss not to point out one important consideration on the downside: revenue growth.
Since 2010, IBM, INTC and MSFT have been headed in the wrong direction; Cisco has at least leveled. And even though I think the other three will turn things around (for separate reasons), this trend shouldn’t be ignored. Should sales continue to weaken, all four are fair game for a close re-examination.
The bottom line is that while each of these four codgers might be experiencing varying degrees of difficulty, they’re still stable businesses, even in the face of changing trends and products. IBM is the face of top-level computing and is positioning itself well in Big Data. Microsoft and Intel, while maligned for their lack of mobile presence, are making headway on that front (here and here). And Cisco showed signs of life back in November thanks to its next-gen businesses.
None of that will equate to breakneck growth, sure, but it should keep these companies afloat if not slowly improving — all the while providing you with a big stream of stable dividends.
So, no, Big Tech isn’t dead after all. It just has a couple wrinkles.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he was long INTC and MSFT.
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