Dividend Yields to 4.6%, Plenty of Cash on Hand: It’s the PC Industry – Bargains or Value Traps?
Is the personal computer really dead or not? We get a lot of inexact information on this topic. One month’s news has smartphones and tablets making PCs quickly obsolete, while the next explains why we’ll always need a big supply of them. But for those interested in certain big-dividend tech stocks, including a couple of Dow components, the answer to this question seems rather critical.
The fortunes of Dell (DELL), Hewlett Packard (HPQ) and Intel (INTC) all depend heavily on a healthy PC market. So, too, do the very nice dividend yields these companies pay, which are 3.3% at Dell; 4.0% at HP; 4.6% at Intel. That’s because despite the best efforts of each, none of them has found a sufficient substitute for the PC-related revenues that built them into huge, market-leading companies.
Fellow Dow stock Microsoft (MSFT) also gets hurt by slow PC sales but to a lesser extent than the trio above. Iffiness about growth prospects at the three has pushed each of their PE ratio below 10. Those share prices are down between 20% and 50% this year.
The answer to the PC death question goes a long way to determining whether these beaten-down shares are, a) great income investments, or b) dreaded value traps. Considering the mixture of recommendations on these shares now, the jury’s still out on that.
All of these companies have a lot of cash on hand, positive free cash flow and underlying earnings covering their dividends now, so imminent dividend cuts are not the concern. Potentially long-term depression of the share prices is, however, since it’s unlikely that share prices would grow if revenues don’t. And while they’re all trying to restructure their way out of such heavy dependence on the waning PC market, there have been mixed and ironic results.
For example: Intel, the biggest maker of chips for servers and PCs, is trying to get more smartphone chip business, but competitor Qualcomm (QCOM) cornered much of that market before Intel got started. All of them are pushing cloud services now, although that will inevitably eat into their server businesses. HP and Dell PCs are losing market share to Lenovo, a Chinese maker that reported 10% PC sales growth last quarter to their double-digit declines. No one knows what to do with printer businesses, whose big sales are somewhat, but not completely, dependent on a decent PC market.
For a long time, most PC sales forecasts called for sustained industry growth, albeit at small rates, in part because of expected high demand in emerging markets. Recent forecast have taken a much gloomier turn. Barclays Capital Analyst Ben Reitzes accuses the industry of being in denial about the long-term damage mobile devices are doing.
Forecasts for about 4% to 6% growth in PC sales this year have been changed to basically flat numbers, and worldwide forecasts generally call for less than 2% growth for each the next four years.
So the PC industry isn’t exactly dead, but our trio of companies hasn’t figured out how to live with it in its new grown-up state. They have not, obviously, sufficiently developed business with faster-growing revenue streams, and this makes them look suspiciously like value traps. But solid fundamentals that help cover dividends and fund new ventures buys each of these companies time. Perhaps the question here isn’t so much whether their core industry is dead, but rather, how long do they have to learn a new one?
Dee Gill a contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine.
Filed under: Company Analysis