Two Cash-Rich Tech Stocks for Now

09/10/2007 12:00 am EST

Focus:

Charles Carlson

Editor, DRIP Investor

Charles Carlson, editor of the DRIP Investor, finds two potential tech winners that have lots of cash on their books and have attractive dividend-reinvestment plans.

Because of the credit squeeze facing segments of corporate America, companies with lots of cash and little debt should find Wall Street much more interested in their shares. Big cash coffers allow firms to pursue acquisitions, fund capital projects, boost dividends or buy back stock. Also, companies with big cash holdings will become increasingly attractive as takeover candidates.

Paychex (NASDAQ: PAYX), a provider of payroll services and other human-resource services for corporations, has more than $4 billion in cash on its balance sheet and no long-term debt. To be sure, most of that money does not belong to Paychex; the firm holds funds for its clients that Paychex eventually releases for a variety of purposes, including payroll taxes.

However, Paychex does earn interest on those held funds, an important part of the firm’s net income. In [the fiscal year ended May 31], interest earned on funds held for clients was $134 million. Paychex is expecting net income growth of 18% to 20% in fiscal 2008, driven by revenue growth of 11% to 13%. The firm is using its strong cash flow and liquid balance sheet to buy back $1 billion worth of stock.

The company also boosted its dividend 43% to a quarterly rate of 30 cents per share. The current yield is 2.7%, well above the 1.9% yield on the Standard & Poor’s 500 index. Given Paychex’s business, a slowdown in the economy would impact job growth, which could hinder these shares. The stock rarely sells at what one would consider a bargain-basement valuation.

Still, I like the stock’s long-term appreciation potential and view Paychex as an excellent way to play higher interest rates and new-business creation. The stock is a buy at current prices. (It closed above $43 on Friday—Editor.) Paychex offers a user-friendly direct-purchase plan. Any investor may buy these shares directly. Minimum initial investment is $250.

Another cash-rich technology stock worth considering is Qualcomm (NASDAQ: QCOM). The stock has been impacted by concerns over Qualcomm’s relationship with Nokia. The two firms have been embroiled in a dispute about royalty fees. Qualcomm has also been impacted by a ruling that bans US imports of new cell phones made with Qualcomm semiconductors, because the chips violate a patent held by rival chipmaker Broadcom. [Earnings] should jump 20% in fiscal 2007 (ending in September).

Qualcomm has $7.3 billion in cash, or over $4.00 per share— roughly 11% of its market value. The stock trades at 19x fiscal 2007 earnings estimates of $1.97 per share, a relatively moderate earnings multiple given the company’s growth potential.

To be sure, some of the patent and royalty uncertainties could hinder the stock’s performance in the near term. Still, I like the long-term potential of these shares and rate the stock a buy. (It closed just below $38 Friday—Editor.) Qualcomm’s direct-purchase plan has a minimum initial investment of $500.

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