This article will present three tech stocks that pay dividends and they are some of the most recognized companies for technology in the world. They all also have large market capitalizations. This article will also analyze their prospects for being able to raise the dividends in the future, along with examining their previous dividend increases. Dividends are a great way to achieve returns in the market while holding stocks to wait for capital gains. Despite the uncertainty in taxes provided by the Fiscal Cliff, I believe dividend stocks are still a great source for investment income.
The first company I will look at in this analysis is Microsoft (NASDAQ:MSFT). Microsoft provides software such as Microsoft Office and has the popular Internet browser Internet Explorer. Its entertainment division produces the Xbox. Currently, Microsoft pays a $.92 per share annual dividend and has a current yield of 3.40%. The company has a trailing p/e ratio of 14.49 and a forward p/e ratio of 8.33. Its dividend works out to be .23 per quarter as it recently increased the dividend from .20 per quarter. The following is a chart of Microsoft's recent quarterly dividends, including only the quarters where it raised the dividend. These amounts are paid out each quarter.
There was no dividend increase for Microsoft in 2009, though it did maintain its dividend of .13 per quarter during that year. In 2012, the dividend increase was 15%. The six year average dividend rate increase per year based on this chart is 21.67%. That is impressive. Based on Microsoft's current balance sheet, it has $5,036,000,000 of cash. Free cash flow (cash flow from operating activities less cash used in capital expenditures) was $29,321,000,000 for the year ended June 29, 2012 based on its cash flow statement. Dividends paid out for that year were $6,385,000,000 in total. This was easily covered by free cash flow. For the first quarter of this fiscal year, based on the cash flow statement, free cash flow was $7,881,000,000. Dividends paid out were $1,676,000,000. The current annual dividend of .92 per share works out to be 31.94% of its analyst consensus fiscal year 2013 EPS estimate of $2.88 per share. For the 2014 fiscal year, the analyst consensus earnings estimate is for earnings of $3.22 per share. If it paid out 31.94% of that, the annual dividend would be about $1.03 per year, or almost .26 per quarter. That would be a 13.04% dividend increase in the following year if that is how it raised its dividend.
In order to continue raising its dividend, Microsoft needs to keep increasing its earnings. It has partnered with Nokia (NYSE:NOK) to produce the Windows based Lumia phones. There is a risk, for both Microsoft and Nokia, that this technology will not woo potential buyers away from Android and iPhones. The initial results are encouraging, however, the product has not been rolled out in large numbers, particularly in the United States. Furthermore, competition from Apple in the Surface versus iPad market is a concern and the competition for application developers is as well. It is essential that Microsoft maintain large market shares in its key markets in order to continue to deliver earnings growth.
The next company I would like to take a look at is International Business Machines (NYSE:IBM). IBM is one of the stocks owned by Warren Buffett's Berkshire Hathaway (NYSE:BRK.B). Based on IBM's company profile, the company operates in five segments: Global Technology Services, Global Business Services, Software, Systems and Technology, and Global Financing. IBM currently pays an annual dividend of $3.40 per share which works out to a current yield of 1.80%. The company has a trailing p/e ratio of 13.78 and a forward p/e ratio of 11.55. This dividend is paid quarterly at .85 per quarter. The following is a chart of IBM's recent quarterly dividends, including only the quarters where it raised the dividend. These amounts are paid out each quarter.
In 2012, the dividend increase for IBM was 13.33%, as the chart above shows. The six year average annual dividend increase percentage based on the chart is 18.75%. This is impressive as well. Based on IBM's current balance sheet, it has $11,909,000,000 of cash. Free cash flow for the year ended December 31, 2011 was $15,738,000,000 based on the cash flow statement. Dividends paid out in 2011 totaled $3,473,000,000 and it also bought back $12,593,000,000 of stock. This dividend amount was easily covered by its free cash flow and had it wanted to pay dividends and have no share buybacks, it could have paid out a lot more in dividends. For the first three quarters of 2012, based on the cash flow statements, free cash flow was $10,158,000,000 and dividends paid out totaled $2,816,000,000. The current annual dividend of $3.40 works out to be 22.52% of the analyst consensus earnings estimate for the full year of 2012 ($15.10). For 2013, the analyst consensus EPS estimate calls for earnings of $16.60. If it pays out 22.52% of that next year, the annual dividend would be increased to $3.74. This would be a 10% dividend increase from the current amount.
IBM earns the majority of its profits from software and services. IBM has a high debt to equity ratio. The stock price likely reflects not only its solid recent results, but also the expected continuation of this trend. If earnings or sales start to disappoint, and earnings growth slows or turns negative, this could really impact IBM's ability to grow its dividend. With this high of a debt to equity ratio (155.39 as of today per Yahoo! Finance), IBM will be required to service this debt in the years to come. That will require cash, and will have to come before any dividends are paid. This is a risk worth considering when trying to determine how much IBM can potentially raise its dividend going forward.
Another great company to look at for purposes of this analysis is Intel (NASDAQ:INTC). Intel is famous for providing the processors that power computers. Its current market capitalization is $102.14 billion. It currently pays out an annual dividend of .90 per share, giving it a yield of 4.40%. Out of the three companies discussed in this article, it currently has the highest dividend yield. The company has a trailing p/e ratio of 8.95 and a forward p/e ratio of 10.64. Its dividend is paid quarterly at .225 per quarter. The following is a chart of Intel's recent quarterly dividends, including only the quarters where it raised the dividend. These amounts are paid out each quarter.
This chart represents 4.5 years' time. For this time period, the average annual dividend increase percentage is 16.84%. Based on Intel's current balance sheet, it has $3,520,000,000 of cash. Free cash flow for the year ended December 30, 2011 was $10,199,000,000 based on the cash flow statement. Dividends paid out in 2011 were $4,127,000,000. This was easily covered by free cash flow. For the first three quarters of 2012, based on the cash flow statements, free cash flow was $4,335,000,000. Dividends paid out so far in 2012 totaled $3,231,000,000. Compared to the other companies above, it had less cash flow left over after paying the dividend than they did. It makes sense though given the higher current dividend yield. It is important to note though, that free cash flow less dividends paid out still totaled $1,004,000,000 which leaves room for dividend increases in the future if this type of cash flow generation is maintained or improved. The current annual dividend of $.90 works out to be 42.65% of the analyst consensus earnings estimate for the full year of 2012 ($2.11). For 2013, the analyst consensus EPS estimate calls for earnings of $1.93. If it wants to maintain or raise the dividend, the payout ratio would have to be raised based on this. Based on this initial analysis, it looks like there is plenty of room to do that. This leads me to the conclusion that the rate of a dividend increase is not likely to be as high of a percentage as the companies above can provide.
Intel, however, does not have a guaranteed path to dividend increases. Currently, the stock price is trading in the lower part of its 52 week range, near the low for this period. Intel's business model faces some risks as consumers switch from traditional PCs to tablets. Also, more and more people are using their smart phones to browse the Internet, which can serve as a replacement for computers for some people. This is a risk for Intel, as it does not currently have a large market share in the tablet or the smart phone market. This article discusses how well Intel is doing so far in its attempt to get into this market. A successful entry into this market is important for Intel if the tablet and smart phone market takes significant market share away from the PC market in the years to come. Its earnings growth may potentially depend on it.
Conclusion - Based on this analysis, all three of these companies appear poised to be able to deliver strong dividend increases. If these companies collectively were to raise their payout ratios, the dividend increases could accelerate far beyond what potential increases in annual earnings would predict based on current payout ratios. This, of course, is highly unpredictable with tech stocks based on the nature of their business. In order to grow their businesses and to compete, large amounts of expenses are necessary for research development, patents, etc. Happy dividend shopping and I think this is a good list of stocks to use to conduct further research.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. This article was written for informational and educational purposes only. It is not to be construed as investment advice or as a solicitation to purchase securities.