By Serkan Unal
Technology stocks have traditionally appealed to growth investors. However, the sector also boasts a potential for income investors who want to combine regular income streams with value investments or investments with prospects for capital appreciation driven by an earnings expansion. There are not so many high-yield dividend stocks in the tech space with consistent earnings power, dividend growth, and the potential for price appreciation. However, high-profile fund managers seeking exposure to the tech sector have pursued several tech names that pay attractive dividend yields. Some investors have also sought opportunities in tech stocks considered attractive value paying high dividend yields. Based on these factors, here is a closer look at four high-yield dividend stocks that have made their ways into the portfolios of some of the world's best-known hedge fund managers.
Intel Corporation (INTC), the world's largest semiconductor maker, has a dividend yield of 4.3%, payout ratio of 42%, and five-year annualized dividend growth of 12.9%. Based on the last-reported 13-F fillings with the SEC, there were at least 40 hedge fund managers we track with a long position in the stock. Largest positions in INTC were held by Ken Fisher, Jim Simons, and Jean-Marie Eveillard. The company holds as much as 14% of its total assets in cash and equivalents. Despite the secular decline of the PC market, Intel, the biggest supplier of chips in the PC space, recently beat consensus EPS estimates. It has its long-term EPS CAGR forecasted at a robust 9.6%. Growth could even accelerate if the company succeeds in migrating towards the mobile-device chips used in smartphones and PC tablets and in marketing custom-made networking chips. While Intel expects to generate low-single-digit sales growth in 2013, its earnings and capex will rise, which could pressure earnings and free cash flow. The stock is still attractive based on valuation. Its forward P/E of 10.9x is trading at a 43% discount to its peers on average.
Lexmark International Inc. (LXK), a supplier of printing, imaging, document workflow, and content management solutions, pays a dividend yield of 4.3% on a payout ratio of 30%. Its dividend, initiated in the fourth quarter of 2011, is 20% higher than at the initiation. Based on the latest 13-F filing, the stock was held as a long position by 17 hedge funds we track. LXK is popular with David Cohen (Iridian Asset Management), Martin Whitman (Third Avenue Management), and billionaire Ken Griffin. This cash-rich company, with 25% of assets in cash and equivalents, is suffering a sales decline due to its exiting from the inkjet hardware and supplies business. The weak economic backdrop in Europe has also hurt sales. In the long run, LXK's business prospects are adversely affected by the increasing trend toward digitalization. However, its growth through acquisitions in the software business looks promising. Still, last month, the stock was downgraded by Deutsche Bank, which said that "LXK's medium-term growth prospects are damaged as its installed base and associated supplies revenue will decline for the foreseeable future, scale benefits dissipate and competitive forces increase." As a result of the weak outlook, analysts see LXK's EPS contracting at an average annual rate of 9.6% for the next five years. The stock is trading at a below-industry and below-historical-metrics price-to-book of 1.4. Its free cash flow yield is high at 10.5%, while its forward P/E is 7.6x (a 28% discount to its industry).
Microchip Technology Inc. (MCHP), one of the fastest growing providers of microcontrollers, is another hot high-yield tech stock pursued by hedge funds. It pays a dividend yield of 4.2%, has a payout ratio of 82%, and a five-year annualized dividend growth of 3.6%. Based on the latest 13-F filing, there were 16 hedge funds we track with a long position in the stock. The most invested were Citadel Investment Group's Ken Griffin, RenTech's Jim Simons, and First Pacific Advisors' Robert Rodriguez (check out First Pacific's top holdings). The firm is flush with cash, holding 40% of total assets in cash and equivalents. The company operates based on stable long-term contracts, which provides for consistent operating cash flows. Analysts see the company's long-term EPS CAGR at 9.0%, a significant acceleration compared to an average annual rate of growth of 0.5% over the past five years. Part of that growth will be accomplished through a recently-acquired Standard Microsystems, a mixed-signal connectivity solutions provider for the automotive, consumer, and PC industries. Last month, Goldman Sachs upgraded MCHP to neutral from sell based on improved valuation. The stock is trading at 18.7x forward earnings, on par with its peers.
Cypress Semiconductor Corporation (CY), the producer of processors and chips for computers, phones, and other integrated electronic devices, has a dividend yield of 4.2% and a payout ratio of 83%. Its regular quarterly dividend, initiated in the second quarter of 2011, was upped 22% last year. Based on the latest 13-F filing, there were 16 hedge fund managers we track with long positions in the stock. Most prominent include Ken Griffin, Jim Simons, and D. E. Shaw. The company, with 25% of assets in cash, will see its EPS rebound sharply next fiscal year with a 64% jump. Still, over a five-year horizon, EPS CAGR is forecasted at negative 2.6% annually. The company's advantage is its leadership in the touch-screen chip arena, which is benefiting from an explosive growth in the smartphone and tablet markets. However, the "anemic" macro climate in its industry is weighing on the company's financial performance. The stock is a play on the touchscreen tablet and smartphone markets, with a particular attention given to Amazon's (AMZN) Kindle Fire HD and Kindle Paperwhite. Cypress Semiconductor trades at 18.6x current-year EPS. However, its price-to-book of 6.0 is well above the industry's 2.6 and the stock's own historical metric of 4.2.