The Internet of Things (IoT) encompasses everything connected to the internet. Instead of limiting the internet to one’s PC or phone, the IoT will connect objects ranging from refrigerators to speakers to item tags to improve operations and collect data. As a result, the possible definition of Internet of Things stocks includes a wide variety of equities, not merely the chipmakers who specialize in IoT devices. This creates both opportunity and confusion for the average investor.
For this reason, I believe one way to look at the Internet of Things stocks involves dividing IoT into three segments. The first and most obvious sector is the chipmakers. These semiconductor manufacturers design the IoT chips and systems themselves.
The second sector is those companies which provide IoT connectivity. That task usually falls to telecoms. This will become even more apparent as the speeds made possible by 5G makes more uses of IoT possible. The third sector is those companies that make the devices that will be connected. This usually involves industrial companies, many whose history predates the tech industry as we know it today.
In my view, the following companies provide an excellent investing avenue for each segment of IoT:
Chipmakers: Intel (INTC)
Intel (NASDAQ:INTC) has evolved as its core PC technology became a less critical sector of tech. One of Intel’s changes involved becoming one of the better-regarded chipmaker stocks — and by extension Internet of Things stocks. For decades, Intel has become masterful at increasing chip capacity while reducing their size.
Hence, adapting this technology to IoT from PCs involved only a minor pivot. Intel now touts their IoT applications in industries ranging from healthcare to retail to education.
INTC stock also stands out from a financial perspective. The equity has seen a much slower recovery than its PC-era peers who also moved on to new applications. The company’s forward price-to-earnings (P/E) ratio stands at only about 11.3, well below the five-year average P/E of 15.8.
While I don’t believe that INTC stock still deserves the premium it commanded at the height of the PC era, I see this multiple as too low. Analysts expect INTC earnings to grow by 20.2% this year. They also expect earnings growth to average 10.2% per year over the next five years. This factor alone should have brought the P/E closer to S&P 500 averages.
INTC stock’s dividend provides additional incentive to invest. This year’s annual dividend of $1.20 per share brings the yield to just over 2.5%. This dividend also increases most years. Still, investors earn a decent payout despite this. With its importance to IoT, low P/E ratio, and high growth rate, I think INTC stock could become one of the more profitable Internet of Things stocks.
Telecom: AT&T (T)
AT&T (NYSE:T), along with its peers Verizon (NYSE:VZ) and T-Mobile (NASDAQ:TMUS), will play a critical role in IoT connectivity. The advent of 5G will enhance the connectivity of all IoT devices. 5G offers speeds between 10 and 20 times faster than the current 4G network. Hence, with this higher speed, more IoT capabilities should become possible.
T stock stands above other telecom-based Internet of Things stocks for its valuation and dividend. In recent years, AT&T faced declines in its landline and pay-TV business. In its wireless division, competition hurt profit margins at a time where it had to spend tens of billions on a 5G wireless network to remain competitive.
These factors placed tremendous pressure on T stock, and today it trades at a forward P/E of 9.7. Also, the cost of its 5G network also serves as an advantage. Its peers also had to spend tens of billions of dollars to build their 5G networks. This factor makes it doubtful price competition will become aggressive. Wall Street also predicts profits will increase by 14.8% this year. Over the next five years, they should rise by an average annual rate of 6.25%.
Finally, T stock’s dividend policy works to the advantage of stockholders. Its dividend yield comes in at just under 5.9%. Despite this high yield, the dividend will likely see an increase because T stock has become a dividend aristocrat, with a 34-year record of consecutive dividend increases. Breaking this streak would place T stock at risk. For that reason, another dividend hike will likely occur in December. With the high dividend, low P.E, and the increased business 5G will probably bring, T stock should finally begin an IoT-inspired turnaround.
Device Makers: Emerson Electric (EMR)
Emerson Electric (NYSE:EMR) is our last Internet of Things stocks to buy. The Ferguson, Missouri-based manufacturer of electrical products began in 1890 as a company manufacturing electric motors. Interest in EMR stock waned over the years, however, as it became a slow-growth manufacturing company.
Thanks to IoT, investors can again regard EMR stock as a tech play. This year, IoT Breakthrough awarded Emerson for its innovation, giving the company its “Industrial IoT Company of the Year” award.
They won this award due in large part to Plantweb. This digital ecosystem helps its devices to harvest data, improve connectivity, and deliver analytics. Moreover, the company’s IoT connected services offer monitoring and data analysis as a third-party service. It has also partnered with Microsoft (NASDAQ:MSFT) to enhance these services.
As a result, EMR stock has risen over 82% from its 2015 lows. With a P/E of 23, it’s clear that investors have begun to catch on to Emerson’s revival. Still, despite the average P/E closely resembling S&P averages, investors may still want to buy at these levels. Profits grew at a rate of 26.9% over the fiscal year that just ended. EMR also predicts profits will rise by an average of 17.1% per year over the next five years.
Dividend growth with EMR stock also matches few other companies. The record of dividend increases goes back 61 years. Given this record, investors should expect another dividend increase in the coming months. The company paid $1.94 per share in annual dividends in the previous fiscal year. This brought the yield to just over 2.5%.
Aside from the dividend, growth has returned to EMR stock. Thanks to IoT and its solid financials, investors should regard EMR as one of the more prominent Internet of Things stocks.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.