The term “tech stocks” and the word “dividends” are rarely used in the same sentence (except perhaps to point out how rare it is for tech stocks to actually pay dividends). Sometimes though, it can make sense for a technology company to give a little bit of its income stream back to shareholders.
But which tech stocks are in the best position to start doling out dividends if they aren’t already? Not that it’s something an income investor would want to count on happening anytime soon, but some companies are closer to making that leap than others.
These five technology companies are the market’s top candidates for some — or more — income distribution in the foreseeable future. In no particular order, here are the tech stocks that could start paying dividends.
Tech Stocks: Citrix Systems (CTXS)
In their defense, many technologies companies need to keep much of their income to invest in their future growth. Citrix Systems (CTXS), however, isn’t one of those stocks.
The company provides a variety of software-based services (SaaS), which once cost relatively little to maintain once they’re deploted. The company’s customers, however, continue to pay a monthly “rental” fee well beyond the breakeven point for the cost to code and sell the software.
Translation: It’s a brilliant model of recurring revenue that makes Citrix Systems is a cash cow. More important, there’s plenty of room for Citrix to share some of the recurring revenue — as dividends — with no real detriment to its growth.
For perspective, CTXS trades at a forward-looking P/E of 18.1 and a trailing price/sales ratio of 3.7. There are cheaper tech stocks out there, but few that can boast the dependable income stream Citrix Systems has.
Tech Stocks: Apple (AAPL)
To give credit where it’s due, Apple (AAPL) has taken great strides to give some of its cash stash back to shareholders, via a $130 billion stock buyback program in addition to its recently instituted (late 2012) — though still modest — dividend payout policy. Even so, the buyback somewhat misses the mark on how it could and probably should put the bulk of this earmarked money back into investors’ pockets. Perhaps the more compelling way of giving money back to investors would be to do it all through dividends.
Just for perspective, AAPL has earned $38.5 billion ($6.20 per share) over the past four quarters, with net margins averaging 21.6%. The company paid a respectable dividend yield of about 2% during that time, but it could have upped that payout to a much more meaningful 4%, and it would have only cost AAPL about $12 billion of that profit. The company could have still kept $26 billion to invest in its future, which is a heck of a lot more than Tim Cook has seemed interested in deploying any other way.
The bottom line is that Apple still has plenty of room to move up the list of tech stocks that pay worthwhile dividends.
Tech Stocks: Zebra Technologies (ZBRA)
While Zebra Technologies (ZBRA) may have at one point been a growth stock, those glory days are most likely over for the company. Now RFID and barcode technologies — the company’s bread and butter — have been mostly commoditized. That’s why a revenue growth rate of 19% in 2010 has been gradually whittled down to no more than 4% in any of the past three years.
That’s not to say Zebra Technologies is ready to be shelved with so many other now-irrelevant tech stocks, however. The key to breathing new life into ZBRA is the decision to pay dividends … something the company’s management team has been oddly averse to thus far.
Zebra Technologies could certainly afford to start sending some cash investors’ way. Even with the revenue and earnings slowdown, the company has reliably logged solid earnings for five straight years, and is in the midst of the sixth; we’re now in the fifth straight year of net margins exceeding 10%, too. Given that stability, the company may want to go ahead and accept that it’s in a commodity-like business, and pay dividends accordingly.
Tech Stocks: Akamai Technologies (AKAM)
Akamai Technologies (AKAM) offers a diverse suite of website acceleration and optimization services to businesses. And like Citrix Systems, the model drives lots of recurring revenue.
Where Akamai Technologies differs from Citrix Systems is its growth pace; Akamai is on pace to boost its bottom line by 24% this year, and the pros are looking for an earnings increase of 17% next year. That puts AKAM in the upper echelon of tech stocks.
And what kind of dividends are Akamai Technologies shareholders enjoying now? Nada — despite net margins of 17.3% for the past 12 months.
Tech Stocks: Check Point Software Technologies (CHKP)
While cybersecurity has always been important, there’s little doubt that 2014 has underscored the world’s need for more and better cloud and network defense. Enter Check Point Software Technologies (CHKP).
Check Point Software makes and markets several software and hardware-based cybersecurity solutions. While sales and earnings have yet to noticeably accelerate in the wake of a growing pace of high-profile computer hacks, IT trend-analytics firm Gartner expects spending on security solutions will ramp up to the tune of nearly 8% this year, when all is said and done.
This increase in cybersecurity spending will certainly benefit several tech stocks, but CHKP is better positioned to use its size and name to muscle its way to the front of the line. Maybe that revenue bump will finally be enough to prod the company into paying dividends.
Check Point Software Technologies can certainly afford to let loose of some of that income. Net margins hover — ridiculously — in the 50% range. And, with $1.2 billion in cash or near-cash now amassed on the balance sheet (versus a market cap of $13.2 billion) in the shadow of what will be an eighth year of revenue growth and the seventh straight year of earnings growth, it’s clear Check Point Software doesn’t need to spend heavily to grow its business.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.