By Carla Fried
Naveed Rahman, an institutional portfolio manager on Fidelity’s equity income team recently called out technology stocks as a compelling place to find companies with the capacity to keep filling the dividend trough given they are generating “prodigious amounts of cash flow, and cannot reinvest all that cash as successfully as they could 10 years ago.”
AAPL Free Cash Flow to Firm (TTM) data by YCharts
For the record, Google (NASDAQ:GOOG) also generated more than $11 billion in free cash flow over the trailing 12 months, but it doesn’t get into this conversation given it has yet to cross over to the dark side (at least in terms of what it seems to say about a company’s growth outlook) and pay a dividend.
So, with it well established that large tech companies are raking in more cash than they seem to know what to do with, it seems the more pertinent question for income seekers is: who has the most compelling dividend story going forward?
If you’re just looking at current dividend yield, Intel leads.
AAPL Dividend Yield (TTM) data by YCharts
But Intel, struggling to gain a foothold in the faster-growth mobile chip market, is also using up a lot more of its cash to cover dividends than the other big boys.
AAPL Cash Dividend Payout Ratio (Annual) data by YCharts
That 55% cash payout ratio isn’t a flashing red signal. But neither is it bright green. After increasing its dividend by 60% between 2009 and mid 2012, Intel hasn’t initiated a dividend bump in more than a year, discouraging news on the dividend growth front.
That may be just a pause that refreshes. But given that the smart investor’s move is to invest in stocks paying dividends that have a likelihood of growing (thereby providing what no bond can) it’s a development worth watching.
Cisco’s 3%+ yield comes with plenty of capacity to keep raising the payout, which the firm is likely to do if only to keep restless shareholders from totally bailing. The reason the yield is now so high is because Cisco’s stock price isn’t.
While the yield is enticing, you’ve got your principal to consider. If you’re looking to collect that yield and are willing to wait for some sort of rebound there are worse places to make that contrarian call: with a PE ratio less cash and EV/EBITDA below 10, Cisco’s a cheap stock with a solid balance sheet. YCharts Pro's Cisco Rating is a strong 9 for fundamentals, for instance. While upside may not be right around the corner, the downside doesn’t seem too troubling.
In terms of total dividend dollars shelled out to shareholders, Apple in just one short year has shot to the head of the class. The chart below, pulled from the Cash Flow statement takes a sec to digest: dividends paid shows up as a net cash outflow, thus the negative. The bigger the sum the better if you’re focused on income.
AAPL Total Dividends Paid (TTM) data by YCharts
We all know there’s plenty of capacity, with Apple’s cash position, to keep the dividend growth coming, but it’s been less than two years since it resumed paying the dividend, so it’s not as if there’s a big track record to fall back on. And in last year’s shareholder peace offering that committed returning $100 billion to shareholders by 2015, $60 billion was earmarked for repurchases. In fact, Apple’s buyback yield is more than double it’s dividend yield, and is the main driver of the current high 6% shareholder yield.
Which brings us to Microsoft. Even with the fresh air pumped in by new CEO Satya Nadella, it’s not easy to see Microsoft getting back into high growth mode. But that’s not what we’re sussing out here. In terms of both a high current dividend yield and the capacity to keep growing its dividend, Microsoft looks like the most compelling bet to serve up big returns to shareholders. Qualcomm has had a slightly higher dividend growth trajectory over the past five years, but with a sub-2% yield it’s not going to appeal to the income investor. And c’mon, both have more than doubled their dividends over the past five years, so let’s not quibble over a few percentage points of difference.
Microsoft’s 3% dividend yield beats both the 2.2% yield on the 10-year Treasury and the sub-2% average for the S&P 500. It’s almost as cheap as Cisco, but unlike Cisco, Microsoft has managed to stay cheap even as its price has moved higher over the past year.
MSFT EV to EBIT (TTM) data by YCharts Disclosure: None