Recently, I wrote an article about tech stocks that were acceptable choices for long-term investments, with a specific point that Apple (AAPL) and Google (GOOG) did not fit this category. I received a lot of feedback from readers, and all of it had two specific themes. First, there were names that investors felt should be included, some I agree with, some not (hence this article). Second, the Apple faithful disagreed with my assertion that the company had no place in a retirement portfolio. Before moving on to part two of my list, I'd like to address that second point.
Apple may very well have a legitimate place in an income portfolio once its transition from growth company to value company is complete. Right now, it seems to be stuck in the middle somewhere. The giant cash hoard, while impressive, isn't quite as impactful as it seems. Once you factor in the amount of taxes and other expenses that must be paid to repatriate that cash, the $137 billion is more like $90 billion. Impressive, but that difference is about 10% of Apple's market cap and indeed makes a difference.
A few things need to happen before Apple becomes a viable long-term play. First, the cash definitely needs to be put to work, hopefully in the form of buybacks or acquisitions. The cash flow of the company is enough to raise the dividend to the 4-5% range without tapping in to its savings. I do agree with Tim Cook that a one-time special dividend is not in anyone's best interest. Second, the growth rate of the company must stabilize. With the current quarter looking like the first in Apple's recent history with negative growth, I'm not willing to bet the farm that this is a one-time occurrence.
Don't get me wrong, I LOVE Apple. I'm simply saying that as a retirement investment (meaning with money you can't afford to lose), my attitude is "wait and see" for now. Without further delay, additional tech names that I like for the long term right now are:
- Lexmark Intl (LXK) - With a 4.71% yield, this printing company pays you to wait for the sector to improve. The leading printing companies, including Lexmark, Hewlett-Packard (HPQ), and Canon (CAJ) have suffered from a lack of innovation over the past few years. I personally use an HP Photosmart printer from four years ago, and I can't see any reason to upgrade to the current year models. As the economy continues to improve, enterprises and government agencies will have more money to spend on upgrading their technology. So why Lexmark? The company realizes that its product innovation has been lagging the overall sector, and it has stepped up R&D accordingly. Lexmark spent 10% of its revenue on R&D last year, and also restructured its production centers and changed its strategy to focus on the areas of the printing business with the most profit potential, like laser printers for enterprise applications.
- STMicroelectronics (STM) - This semiconductor manufacturer has one of the most diverse product portfolios and customer bases in the highly cyclical semiconductor industry, which is why it is my pick from that sector. STM is the largest European semiconductor manufacturer, with products covering all of the major categories of semiconductor devices. Only 24% of the company's revenues are dependent on Europe, with the majority (62%) coming from Asia. As for its diverse customer base, 27% of STM's revenues come from the telecom industry, with the rest coming from automotive (17%), computing (14%), consumer goods (10%) and industrials (9%), and distributors (23%). Therefore, STM's business is not too dependent on any one industry. As far as dividends go, STM pays a yield of just over 5%, making it a great choice for income.
- AT&T (T) - NOT Verizon (VZ). While I love Verizon as a company and have written in its favor several times, I feel that it has gotten a bit ahead of itself. The outperformance of Verizon is likely a result of Vodafone (VOD) rumors going around, in addition to higher forward growth expectations (the consensus is 11% annual growth vs. 7.3% for AT&T), but the discrepancy has gotten too great. The yields have separated significantly over the past few months. AT&T now yields 4.94%, significantly more than Verizon's 4.2%. These may sound close, but on a million dollar retirement portfolio, this is a $7,400 difference in annual income! Additionally, Verizon simply seems overvalued, trading at about 21 times earnings, as opposed to a P/E of under 16 for AT&T. For a more extensive explanation of why Verizon is overvalued compared to AT&T, fellow contributor Christopher Grosvenor wrote a great article analyzing just that.
Now, between this list and my last one, long-term investors have a list of six great choices for the technology allocation of their long-term investments. With choices like these and the nice income they provide, there is definitely something for everyone here!
Additional disclosure: I do own Apple LEAPS options and Hewlett-Packard shares, just not in my retirement accounts.