Tech Stocks That Should Follow Apple's Lead

Includes: ATVI, DVMT
by: Bret Jensen

Apple (NASDAQ:AAPL) recently made an announcement on the largest stock repurchase program in corporate history ($60B) and also increased its dividend payout substantially as well. This has unleashed a predictable slew of similar moves by others in the Tech sector. Both IBM Corp (NYSE:IBM) and Nuance Communications (NASDAQ:NUAN) have announced substantial repurchase programs since Apple's capital allocation decision.

Stock repurchases make a lot of sense here and could go a long way to increasing shareholder value. First, stocks in the tech sector are selling a discount to the overall market and some have very cheap valuations. Companies initiating programs at these levels are "buying low". Demand growth is uncertain and tepid so there is not a whole lot of other good uses for tech companies' growing cash hoards. Major acquisitions within technology (Hewlett Packard/Compaq, Oracle/Sun, etc.) have historically destroyed shareholder value so that is not necessarily a viable alternative. Finally, interest rates are at historical lows so it is easy to raise funds for repurchases and/or dividend hikes while avoiding the significant additional taxes that would occur if these companies repatriated overseas profits to initiate these allocation strategies.

Here are two tech companies that have the capital structure to make these types of allocation decisions which could substantially increase their appeal to shareholders.

EMC Corporation (EMC) - One of the last large capitalization tech stocks (market capitalization: $49B) that does not pay a dividend. It certainly has the cash to do so with almost $5B in net cash on the books. That would be enough to buy back some 10% of its float at current prices or it could initiate a dividend payment of 2% to 3% in conjunction with a lesser repurchase program. EMC is undervalued here without any capital allocation changes. It is projected to grow revenues at 8% annually over the next two fiscal years and the stock has a five year projected PEG of under 1 (.93). The shares go for just over 11x 2014's projected earnings.

The company also owns 80% of VMware (NYSE:VMW), leaving it another avenue to increase shareholder value by spinning off this fast growing server virtualization software maker. EMC is making a baby step by spinning out "Pivotal", a collection of web/mobile software development tools & big data analytics software. The company will retain almost 70% of the joint venture with VMware and this new company should have $300mm in annual revenues in 2013.

Activision Blizzard (NASDAQ:ATVI) publishes online, personal computer, console, handheld, and mobile interactive entertainment worldwide. The company has almost $4.5B in net cash on the books which amounts to over 25% of its current market capitalization. Despite the fortress balance sheet, Activision only pays a dividend of 1.3%. Obviously the company could significantly expand repurchases and dividend payouts without affecting its financial flexibility. The company has three great franchises in Call of Duty, Diablo and World of Warcraft. Analysts consistently underestimate the company's earnings power. Activision has beat earnings estimates for twelve straight quarters. The stock sells near the bottom of its five year valuation range based on P/E, P/B, P/CF and P/S. The company has also grown revenues and earnings at better than a 14% CAGR over the last five years.

Disclosure: I am long ATVI, EMC. 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.