For years, technology stocks have been considered one of the premier sectors for growth investors to reap huge capital gains. While opportunities will still exist within the sector to identify stocks with explosive growth for incredible gains, many of the strongest and best run companies have begun paying and raising dividends. While some technology stocks have been paying dividends for years, for many of these tech stocks, they are just beginning to build dividend histories which will attract a new class of investor, dividend growth investors. With this shift in strategy, the future of investing in tech stocks may lie in dividend growth investing, and the future of dividend growth investing may lie in tech stocks. In this article we will look at a number of established dividend growth tech stocks, as well as some of the newer dividend paying tech stocks that could turn into great dividend growth stocks.
International Business Machines Corp (IBM)
IBM is an American multi-national technology and consulting firm. While IBM falls within the IT Services sector, the company's offerings are diverse and span the range of the technology sector, from software to cloud computing and datacenter operations. IBM has a track record of steadily growing EPS.
IBM is a giant in the world of IT Services, with a market cap of $237B. As of this writing, IBM trades for $205.80 with a TTM P/E ratio of 15, slightly above the five year average P/E of 13.1. In 2011, IBM produced full year revenue of just under $107B. Over the past five years, IBM has grown EPS by a 16.6% CAGR, and expectations are for EPS to continue to grow by nearly 10% over the next five years. This Warren Buffett approved dividend growth stock currently pays a $3.40 annual dividend, which at today's prices equates to a 1.63% yield. Based upon estimated EPS from 2012 of $15.14, IBM is expected to pay out just 22% of earnings as dividends. IBM has increased their dividend annually for the past 17 years, and over the past 5 has managed a CAGR of 16.27%.
IBM appears poised to be a sound investment for dividend growth investors for years to come. The company expects double digit earnings growth, which should continue to reward investors with capital gains in the years to come. In addition to solid capital gains, IBM has significant room to grow its dividend thanks to its EPS growth, and low payout ratio. While IBM may not be able to grow dividends at 16% for years to come double digit growth is not out of the question. I believe is a great company, and possibly a better stock, but investors should hope for the stock to pull back to bring the P/E more in line with historical averages (~$180), and for additional clarity on the state of government spending, before jumping on board.
Intel is the world's largest semiconductor chip maker. With 2011 revenue of $54B, Intel is the undisputed industry leader. The company is most well-known for its stranglehold on the PC market, but in 2009, the company completed a reorganization to align with all of the major product groups including: PC, Data Center, Communications, and Mobility.
As of closing today, INTC shares can be bought for $21.68, giving shares a TTM P/E of 9.2. This is well below the company's 5 year average of 17.7. The company has already issued guidance lowering full year earnings in the wake of soft PC demand, but over the next 5, years earnings are expected to grow by nearly a 12% compound annual growth rate (CAGR). INTC currently pays out 34% of earnings in dividends. The current annual of $0.90 works out to an annual yield of 4.15% based upon today's prices. The company has shown a commitment to maintaining and growing the dividend and over the past 5 years, and has averaged nearly 15% dividend growth.
Headwinds certainly exist for INTC in the wake of soft PC demand, but with the revenue and R&D funding within INTC they should be able to gain market share in the smartphone and tablet world. While overall PC sales have decreased in recent years, as hiring worldwide picks up INTC should benefit as PCs are still the ultimate business tool. With a low payout ratio, little debt, an incredibly low valuation, and expected double digit earnings growth, INTC should reward patient DGI investors in the years ahead.
Microsoft develops, markets, and sells software, computer operating systems, hardware, and services. Microsoft is most well-known for its Windows Operating System and Microsoft Office products. As of closing on October 11th Microsoft shares traded at $28.95. Based upon TTM earnings of $2.01/share, shares have a TTM P/E ratio of 14.49 above the five year average P/E ratio of 12.45. Earnings per share have declined 25% year on year, but in the five years ahead MSFT is expected to grow earnings at 8.7% annually. Microsoft pays an annualized dividend of $0.92 which equates to a dividend yield of 3.1%, based upon today's share price. MSFT has grown the dividend at a CAGR of 18.1% over the past five years. With a 10 year history of annual dividend increases and paying out just 37.6% of earnings as dividends, MSFT appears to have room to grow dividends ahead.
While Microsoft faces similar challenges to those of INTC (soft PC demand and limited exposure to mobile and tablets) as the company rolls out new products (Windows 8, Microsoft Office 2013, etc.) and corporate refresh cycles take effect MSFT should stand to see significant gains in earnings. While I believe shares are currently slightly overvalued investors should keep an eye on Microsoft. If shares pull back below $27, investors should consider taking up a position to capitalize on recovering PC demand and the introduction of new and refreshed Microsoft products.
New Dividend Payers
Apple, which issued its first dividend payment in August of 2012 is currently paying an annual dividend of $10.60, has the potential to become a great dividend growth stock in the years to come. Based on the current share price of $628.10, Apple yields 1.68%. AAPL is expected to have EPS for the year ending September 30, 2012, of $44.42, giving the stock a payout ratio of roughly 24%. Apple is expected to grow earnings by 24% over the next five years, and with a TTM P/E ratio below 15, well below the five-year average of 20.7, shares appear undervalued.
Many consider Apple to be one of the best stocks, and best companies, on the market. In addition to this, Apple stock does not have a history of dividend growth, but with the incredible cash flow, growth in earnings, and no debt AAPL has significant room to continue to grow the dividend. With no established dividend history, investors must weigh the opportunity carefully, but the opportunity certainly does exist for the dividend to grow significantly. I believe Apple will reward shareholders in the years to come with continued share price appreciation and dividend growth.
Dell Inc. (DELL)
Dell is a well-known computer manufacturer, who in recent years has expanded their business beyond PCs and laptops to include mobile, computer peripherals, servers, networking, storage, and services. Dell faces similar challenges to many of the other companies on this list. Weak PC demand has hurt earnings over the past year, and in fact EPS have fallen by 12.5% over the past 12 months. In addition to the earnings decline, Dell has been losing market share to other PC manufacturers. With this decline in earnings and market share, shares of DELL have fallen 41.7% over the past 12 months.
Dell shares currently trade at $9.35, and based upon TTM EPS $1.69 shares have a TTM P/E ratio of 5.6, below the five year average of 12.65. Dell is expected to show slight earnings growth of 4.5% over the next five years. Dell has issued just one dividend payment, $0.08 in Q3 2012. On an annualized basis, shares yield 3.4% and Dell is paying out less than 20% of earnings as dividends.
Dell faces significant challenges in the years ahead. The soft PC sales that have been seen across the industry have hit Dell particularly hard. In addition to lower sales, the company has been losing market share. With all that being said, Dell has made a number of acquisitions to build presence in specific in-demand technology areas. I believe expectations for Dell are low, and the company will likely outperform over the long term. While near term performance may leave investors less than satisfied Dell has the ability to grow the dividend and reward investors for waiting while the company gets back on track.
Cisco Systems, Inc. (CSCO)
Cisco is a market leader in the world of designing and selling Internet Protocol based networking and other communications equipment. CSCO has a market cap of nearly $100B, on TTM revenue of $46B. CSCO shares currently trade at $18.26, with a TTM P/E ratio of 12.29, well below the company's five year average P/E of 16.59. Over the past 12 months CSCO shares have risen by 7.8%, as earnings per share have grown by 28.4%, and over the next five years, CSCO expects to maintain a CAGR of 7.85%.
CSCO initiated dividend payments in 2011, and made three quarterly dividend payments (Q1, Q3, and Q4) of $0.06. Currently, CSCO shares are paying an annualized $0.56 dividend, which at today's trading price equates to a 3.06% dividend yield. With a current payout ratio of just 18.67%, CSCO appears to have significant room to continue growing the dividend.
Cisco shares appear to be undervalued at this time. Cisco is expected to have just moderate growth in the years to come, but investors who purchase the stock now would obtain a strong company at a fair valuation with significant ability to grow the dividend in the years ahead.
Tech stocks have generally been the realm of pure growth investors, but as technology companies have grown, evolved, and matured they have entered the world of dividend growth investing. While not all great dividend growth stocks are in the technology sector, many great technology stocks are now paying dividends and have ample room to grow them in the years to come. Dividend growth investors must assess the headwinds to the technology industry, but with careful analysis they can identify opportunities within the technology sector to build their dividend growth portfolio through capital appreciation and increasing dividends.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.