Investors have generally considered tech stocks as growth stocks. However, to be technically precise (pun intended), most tech stocks would be better described as a quasi-cyclical growth stocks, at least historically. On the other hand, a case could also be made that most tech stocks are in truth chameleons that are ever changing how they look.
It could be argued that tech stocks were growth stocks during the five infamous years known as the irrational exuberant period, 1996 through calendar year 2000. Then, they morphed into more pure cyclical stocks for the five years that began with the 2001 recession through calendar 2005. Over the most recent past five years, 2006 through current, they have now evolved into dividend growth stories.
Fundamentals at a Glance
It's important to note that we are offering this thesis based on fundamental performance, not stock price volatility. In other words, to make our case, we're going to present five high profile tech stocks through the lens of our EDMP, Inc. F.A.S.T. Graphs™ since 1996.
We draw your attention to the orange line with white triangles (the earnings justified value line) for each company over each five-year period. Notice how earnings growth for the first five years is very high and consistent for each company, and very erratic over the next five years before they morphed in the final five years into dividend payers. Also notice how the light blue shaded area, which represents dividends paid out of earnings, is most visible over the last five years.
The background time frames are color coded as follows: The growth years 1996 through 2000 are shaded light yellow, the cyclical years 2001 through 2005 are shaded pink and the dividend growth years 2006 through 2000 are shaded light purple.
Above-Average Dividend Yield
An equal investment in each of these five high profile tech stocks would qualify as a growth and income portfolio due to the following characteristics: First, their combined starting dividend yield would average 3.1%, which is currently above the yield on a 10-year treasury bond. Next, each selection has increased their dividend each year since 2005. Finally, each selection is forecast to grow at double-digit rates for the next five years based on the consensus of leading analysts reporting to FirstCall.
Figures 1A and B through 5A and B below provide a graphical representation of what has thus far been written about in this article. We hope you find it interesting to see how these companies have morphed from growth to cyclical, and then into growth and income stocks since 1996. Could it be possible that this relatively new and modern industry is maturing and becoming more mainstream?
Microchip Technology Inc. (MCHP)
Figure 1A reviews Microchip Technology Inc., which manufactures specialized semi-conductor products for a wide range of embedded control applications. They are the highest yielding company of our five tech selections at approximately 4.6%. During the five-year period 1996 through calendar 2000 Microchip Technology Inc. consistently grew earnings at approximately 20% a year which clearly qualified it as a growth stock during this time frame.
Then, during the cyclical five-year period starting with the recession of 2001 through calendar year 2005, Microchip Technology Inc.'s earnings growth slowed to just over 8% and earnings were much less consistent during this time frame. More recently, Microchip Technology Inc. has clearly become an above-average dividend yield story.
Figure 1A MCHP 15yr. EPS Growth Correlated to Price
click to enlarge
Figure 1B calculates the performance associated with Figure 1A. Microchip Technology Inc. declared their first dividend in calendar year 2002 and has increased it every year since, albeit only modestly in calendar year 2009, due to earnings weakness. Since calendar year 1996 Microchip Technology Inc. has outperformed the S&P 500.
Figure 1B MCHP 15yr. Performance History
Linear Technology Corp. (LLTC)
Figure 2A reviews Linear Technology Corporation, a designer and manufacturer of high-end linear chips that monitor, amplify, condition or transform analog signals associated with real-world phenomena such as temperature, pressure, weight, position, light, sound and speed, etc. From 1996 through calendar year 2000, Linear Technology Corp. was a true growth stock as they compounded earnings at over 27% per annum. However, their earnings growth also slowed and became somewhat cyclical over the 2001 through 2005 time frame. Linear Technology Corp. currently yields approximately 3%.
Figure 2A LLTC EPS Growth Correlated to Price
Figure 2B calculates the performance associated with Figure 2A. Although Linear Technology Corp. has paid a dividend since 1996, their payout ratio was low until 2002 and has steadily increased ever since. Linear Technology Corp. has also outperformed the S&P 500 since 1996.
Figure 2B LLTC 15yr Performance History
Intel Corp. (INTC)
Figure 3A previews Intel Corp. the leading manufacturer of integrated circuits. Intel's recent earnings announcement that exceeded analyst estimates caused the stock price to rally which brought the yield down to just under 3%. For the five years 1996 through calendar year 2000 Intel grew earnings at over 22% per annum, and in calendar years 1999 and 2000 their stock price soared to irrational exuberant levels before peaking and coming back down to reasonable values by calendar year end 2000. From calendar year 2001 through 2005 Intel's earnings became very cyclical as the tech bubble had burst.
Figure 3A INTC 15yr. EPS Growth Correlated to Price
Figure 3B calculates the performance associated with Figure 3A. Although Intel Corp. had paid a dividend every year over the time frame from 1996 through 2000, their payout ratio was very low. It can be argued that they really didn't become a dividend paying company of any report until calendar year 2004. In calendar year 2006 their payout ratio grew into a number that is associated with legitimate dividend paying companies. Intel has also outperformed the S&P 500 since calendar year 1996.
Figure 3B INTC 15yr. Performance History
Analog Devices Inc. (ADI)
Figure 4A reviews Analog Devices Inc., a manufacturer of linear, mixed signal and digital integrated circuits for real world signal processing applications. The compounded annual growth rate of earnings for Analog Devices, Inc. over the timeframe 1996 through calendar year 2000 was 34.2%. However, most of the growth occurred in calendar years 1999 and 2000. Then earnings became very erratic and cyclical over the timeframe 2001 through 2005. From here on they have become a slightly above-average dividend investment.
Figure 4A ADI 15yr. EPS Growth Correlated to Price
Figure 4B calculates the performance associated with Figure 4A. Analog Devices Inc. declared their first dividend in calendar year 2004 and has steadily increased in along with their payout ratio every year since. Analog Devices Inc. has also outperformed the S&P 500 since 1996.
Figure 4B ADI 15yr. Performance History
International Business Machines Corp. (IBM)
Figure 5A reviews International Business Machines Corp., which is arguably the most recognized name in all of information technology. Although IBM, also known as Big Blue, only grew earnings at approximately 11% during the time frame 1996 through calendar year 2000, they did it in a very consistent manner. Over the cyclical period 2001 through 2005, IBM's earnings did slow down but continued to be more consistent than any of the other examples in this article. However, since calendar year 2006, this $167 billion behemoth has remarkably grown earnings at just under 16% per annum.
Figure 5B calculates the performance associated with Figure 5A. In comparison to the other four names covered in this report, IBM has been a paragon of consistency. They have paid and increased their dividend every year during the time frame we have measured here. IBM has also outperformed the S&P 500 since 1996.
The five tech stocks covered in this article are high profile technology stocks that share many common characteristics. We hope you found it interesting to observe how they have morphed from growth to cyclical, and now to what many consider to be more conservative growth and income selections. Even though these tech stocks possess current dividend yields that appear attractive, these companies lack the long-term consistency that one would find with dividend aristocrats.
On the other hand, based on consensus estimates for growth, these tech stalwarts are expected to grow at above-average double-digit rates over the next five years. Therefore, we caution perspective investors to research each selection thoroughly before making an investment. With that said, it’s possible that one or all of these selections could be utilized to turbo-charge an otherwise conservatively constructed growth and income portfolio.
Disclosure: Long MCHP, INTC at the time of writing.