You Want Dividend Yield and a Low PE Ratio: We Evaluate Older Tech Stocks
Some bullish market strategists suggest looking in the old boy tech sector for bargains and dividends now, figuring that even these slow-growth companies stand to make gains amid improving economic indicators. But finding an obvious conservative value play here isn’t easy.
It’s true that shares of big old tech like Cisco Systems (CSCO) and even Texas Instruments (TXN) haven’t kept pace with the broader market lately. Microsoft (MSFT) and Intel (INTC) actually lost ground. International Business Machines (IBM), which had a very good run in recent years as it reinvented itself, had a lackluster 2012. Tech investors worried that the growth in these companies had slowed to a crawl.
None of these companies has found a formula that will erase worries of stagnation. They’re huge corporations – market caps are above $100 billion for most of them – and the technologies that shot them to fame have been overshadowed by technologies they don’t dominate (namely, mobile devices). But broad economic recovery, the theory goes, will lift the fortunes of these companies, too, and at today’s low valuations, measured by PE ratio, it wouldn’t take much growth to give investors decent returns.
Note that Texas Instruments shares are still much more expensive than the others, so we’ll drop that one from the bargain hunt for now. Note too that we didn’t show here Dell (DELL) or Hewlett-Packard (HPQ) despite their below-10 PE ratios and high dividend yields, as their heavy reliance on the fading personal computing industry makes their situations particularly precarious.
IBM’s dividend yield at 1.8% is a bit stingy. Dividend yields at Cisco (2.8%), Microsoft (3.4%) and Intel (4.2%), paired with their low valuations, make them the most likely of the old tech candidates for cyclical growth.
Yet regardless of strategists’ opinions, none of these three companies is overwhelmed with buy recommendations from the analyst community. Network equipment seller Cisco is the most popular. But investors are divided about whether its shares are worth much more than recent gains gave it. Some value investors, like Sam Peters of the Legg Mason Value Trust, saw the recent gains as a chance to take profits. Others, like Donald Yacktman and Ronald Olstein, bought more.
Opinions on Microsoft are particularly mixed. Its new Surface tablet wasn’t exactly a hot Christmas present after all, leaving much of its revenue stream still PC-vulnerable. But Microsoft has a lot of cash, and lately, it has generously spent it on dividend hikes and share repurchases. It also has significant revenues from Xbox and other things unrelated to old school computers.
Intel, which makes lots of chips for notebooks and desktops and few for mobile devices, has apparently convinced a handful of analysts that it’s a value trap. There are at least four sell ratings on the shares now, which is unusual for a company of this size. However, the stock still has very serious fans, including Wells Fargo Analyst David Wong. Wong believes Intel will benefit greatly from smartphone and tablet sales because it’s a leading maker of chips for servers, which support the deluge of data coming from these devices. Morningstar, too, rates Intel as attractive because of non-PC-related business segments.
These companies all tout strong fundamentals. The risk here is mainly that sales will not recover even in a stronger economy. No one expects double-digit revenue growth at any of these companies. But it will be a lot easier for everyone to make money if these revenue lines take at least a tiny turn north.
Dee Gill, a senior 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. She can be reached at firstname.lastname@example.org.