Inside Wall Street: Nine Surprising Total-Return Plays in Technology
Something unusual is happening in the ever-exciting world of technology: The glamorous high techs that elicited immense awe as global growth leaders are now in the new proletariat class of attractive dividend plays. What's going on?
Two things: First, cash-rich tech companies have encountered speed bumps, slowing them down from the rapid growers that they used to be admired for, leaving investors disenchanted with the group. Second, they're doing what was once unthinkable for growth plays: paying rich dividends to shareholders to spiff up their appeal.
Microsoft (MSFT), Intel (INTC) and Qualcomm (QCOM) are among the tech behemoths that have already initiated hefty dividend payments, and several other tech companies are planning to join the payout derby, including Cisco Systems (CSCO), which has announced it plans to pay a dividend yield of 1% to 2% next year.
"They've Transformed Themselves"
Surprised? Don't be. "Technology stocks -- specifically information-technology stocks -- have undergone a striking sea change," notes investment manager Stephen Leeb, president of Leeb Asset Management. "They're no longer pure, high-flying growth plays," he laments. "They've transformed themselves from pure growth to total-return plays that pay a nice dividend while continuing to offer decent growth." Leeb is a growth-play devotee who invests primarily in companies with a record of speedy expansion enhanced by underlying undervalued assets.
Not too long ago, info tech was the quintessential growth sector, with companies capitalized at wildly lofty price-earnings ratios. At the time, those seemingly rich p-e multiples were far from irrational because the lofty high techs delivered 40% or higher earnings growth. And then the unexpected happened: A vicious bear market savaged the market. Techs slumped, falling as much as 50% below their highs in 2000.
"Today, both growth rates and p-e multiples of tech stocks remain suppressed," notes Leeb, with many of them trading at just a fraction of their old highs. Yet many remain dominant within their industries, says Leeb. They're still good buys but for reasons other than zippy growth.
Leeb lists nine tech stocks (including Cisco) that he believes stand out as total-return (stock gains, plus dividends) investment choices:
Microchip Technology (MCHP), maker of specialized chips called microcontrollers that form the "brains" of most electronic devices. It pays a current dividend yield of 4.4% with projected five-year yield of 7.1%. The stock is trading at $32 a share.
Intel, the world's largest maker of semiconductor chips. Known for its dominant market share in microprocessors for PCs, it has a payout yield of 3.3% and projected yield of 5.3%. It's now trading at $21.
Linear Technology (LLTC), a maker of linear integrated circuits used for a variety of products, including wireless and wire-line telecoms. It has a current yield of 3% and projected yield of 5%. It's trading at $31.
Analog Devices (ADI), a manufacturer of a broad line of high-performance analog, mixed-signal and digital-signal-processing integrated circuits. It has a yield of 2.8% and projected yield of 4.5%. It's now trading at $34.
Microsoft, the world's largest software maker with a near-monopoly share in desktop operating systems. It pays a dividend yield of 2.6% and projected yield of 5.2%. The stock is trading at $25.
Xilinx (XLNX), the world's largest supplier of programmable logic chips and related development system software. It yields 2.4% with a projected dividend yield of 4.2%. It's trading at $26.
IBM (IBM), an info-tech giant providing hardware and software systems, with the largest global services business. It's paying a dividend yield of 1.8% and projected 3.8% yield. The stock now trades at $142.
Qualcomm, which focuses its products and services on advanced wireless broadband technology, including its CDMA mobile standard. It's paying a yield of 1.7% and projected yield of 3.4%. It's now trading at $46.
Cisco Systems, the world's largest supplier of high-performance computer networking systems, expects to provide a 1.5 to 2% dividend yield and projected yield of 6.1%, whose stock is trading at $19.45 a share.
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"These numbers alone make clear that total returns from these stocks are likely to be very high over the next few years -- even if it seems increasingly likely that growth is lackluster," says Leeb. He expects all the nine companies will raise their dividends substantially over the next five years. He notes that dividend growth over the past five years has outpaced profit growth by some 18 percentage points annually.
So, the high techs can still be considered growth-oriented, but in the currently challenging times, they should be regarded more as strong income and solid total-return stocks, says Leeb. Which isn't shabby at all, since that would be the savvy way to play them right now.
