Two Techs for Dividends

02/19/2016 8:00 am EST


Scott Kessler

Deputy Global Director & Industry Analyst, CFRA Research

The tech sector historically hasn't been known for dividends. But after years of dividend increases, the sector recently yielded 1.7%, compared with 2.3% for the S&P 500, notes Scott Kessler, analyst with S&P Capital IQ in Marketscope.

Today, 47 of the 68 technology companies in the S&P 500, or 69%, pay dividends. Interestingly, the equal-weighted average yield of these dividend payers was 2.5% on January 21.

We reviewed the 68 companies in the S&P 500 technology sector, looking to find companies generating considerable cash flows, with strong and flexible balance sheets, paying significant dividends, and expected to generate healthy long-term EPS growth.

The metrics we used to identify these companies are free cash flow over the past 12 months ($1 billion or more), net cash ($1 billion or more), dividend yield (3.0% or more), and projected five-year EPS growth (5% or more).

Interestingly, only four companies meet these criteria; two are profiled here:

Cisco Systems (CSCO) is a market leader in networking equipment. The company generated free cash flow over the past 12 months of $9.0 billion and had net cash of $36 billion as of November.

As of January 21, the stock's indicated dividend yield was 3.7%. The Capital IQ consensus indicates projected five-year compound annual EPS growth of 7.7%.

We see the company moving from a revenue decline in fiscal year 2015 to revenue growth in fiscal year 2016, despite the negative impact of forex.

Importantly, we don't expect the company to prioritize capital allocations to acquisitions, given past related challenges.

Qualcomm (QCOM) is a leader in mobile chip technology. It generated $5.0 billion in free cash flow over the past 12 months and had net cash of $20 billion as of December.

The stock's indicated dividend yield was 4.2% as of January 21 and the Capital IQ consensus for projected five-year compound yearly EPS growth is 13%.

We see a revenue decline in fiscal year 2016, but an increase in fiscal year 2017. After announcing it wouldn't split the company in two late last year, we see Qualcomm looking for ways to deliver shareholder value.

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