The large cap tech sector has gone through a huge transformation over the past dozen years as far as value and dividend investors are concerned. During the internet boom, large tech companies routinely sold for 30 to 80 times earnings and did not pay any dividends. Today large cap tech stocks go for 8 to 15 times earnings and pay solid dividend yields of 2% to 4%. With the recent decisions of Dell (DELL) and Apple (AAPL) to initiate dividends, the only one of the top ten large cap tech companies by market capitalization to not pay a dividend is Google (GOOG).
The outlook for dividend growth from the tech sector is strong. Moody's investor service projects the tech sector will pay out $26B in dividends in FY2012, an over 14% increase over FY2011 and faster than the roughly 11% annual growth of the prior four years. The tech sector also only pays out only 21% of its excess cash flow after capital expenditures in dividends, compared with 43% for most other industries also according to Moody's. In addition, a huge amount of excess cash is currently trapped overseas by the current corporate tax policy. This could change through a Romney victory in November as the likelihood of a "Tax repatriation amnesty" law would increase greatly providing another tailwind to robust dividend growth. Given this, I think large cap tech is a solid sector to invest in for value and income investors. Here are my two favorite large cap tech stocks due to low valuations, solid dividend yield and prospects for robust dividend growth in the future.
Microsoft (MSFT)
Current Dividend Yield: 2.7%
Annual average dividend growth over five years: 14.4%
Payout ratio on 2011 earnings: 29.7%
4 Reasons to buy MSFT at $30 a share for value investors:
- The stock is selling at the bottom of its five year valuation range based on P/E, P/B, P/CF and P/S.
- The company has one of the four AAA rated balance sheets in the S&P 500 and has $50B in cash currently trapped overseas.
- The stock sells for just 9.7 times forward earnings, a discount to its five year average (12.5).
- Earnings and revenues should accelerate solidly with the rollout of Windows 8. FY2013 estimates have also gone up nicely in the last two months.
Intel (INTC)
Current Dividend Yield: 3.1%
Annual average dividend growth over five years: 13.8%
Payout ratio on 2011 earnings: 35.1%
4 Reasons to buy INTC at $27 a share for value investors:
- The stock is selling near the bottom of its five year valuation range based on P/E, P/B, P/CF and P/S.
- Consensus earnings estimates for both FY2012 and FY 2013 have risen nicely over the last two months.
- The stock sells for just 10.1 times forward earnings, a discount to its five year average (15.3).
- Like Microsoft, earnings and revenues should accelerate in FY2013 with the continue rollout of the Atom chip and increasing penetration in the mobile space.
