The technology stocks in the S&P 500 (.SPX) have returned about 50% over the past year, far ahead of any of the index’s other 10 sectors.
If tech shares do cool off, the ones that sport attractive yields and trade at relatively low price/earnings ratios could be smart plays. That’s partly because a big yield can offset some capital losses, and partly because tech shares fitting those criteria are already cheap and don’t have as far to fall as more highly valued names.
To find some stocks that meet these defensive criteria, Barron’s started with a subset of the tech stocks in the S&P 500 index—notably those with yields of at least 2.5% and P/E ratios no higher than 15 times the current fiscal year’s profit estimate. Excluding some companies that have had big returns over the past year, as well as some smaller-cap stocks, Barron’s narrowed the initial group down to four companies that met these criteria. Of course, these companies come with investor concerns—hence their relatively high yields—and there are no guarantees.
The company with the biggest yield on the list is IBM (IBM) at 4.7%. IBM has returned about 16% over the past year, hardly a disaster but badly trailing the tech sector. A major concern is sales growth. IBM last year earned $12.80 a share, down from $13.81 in 2018, according to FactSet. A company spokesman attributed the decline to “the impact of certain accounting rules for the purchase of Red Hat.” The consensus estimate for this year is $13.28.
During the company’s third-quarter earnings call in October, CFO James Kavanaugh said that over the previous nine months, the company had returned $5.6 billion to shareholders, including $4.3 billion in dividends. IBM suspended its share-buyback program when it closed on its acquisition of Red Hat in July for about $34 billion. In April, the company declared a quarterly dividend of $1.62 a share, up 3%.
Even though the company’s top-line growth has been challenged at times, IBM continues to generate plenty of cash flow to support its dividend. As of Sept. 30, it totaled $12.3 billion over the previous year.
Cisco Systems (CSCO), whose stock yields close to 3%, also generates a lot of cash flow. In the fiscal year that ended in July, the company’s free cash flow totaled nearly $15 billion, up from $12.8 billion a year earlier. Analysts expect the company to earn $3.24 a share this fiscal year, which ends in July, up 5% from $3.10 last year.
The company, which makes data network switches, routers, and other products, said in its most recent annual report in October that it intends to return at least 50% of its annual free cash flow to shareholders via dividends and stock repurchases.
The two other stocks in the table are Broadcom (AVGO), whose products include semiconductors used in smartphones, and Hewlett Packard Enterprise (HPE), whose portfolio includes servers, data storage, and networking equipment. The stocks yield 4.2% and 3.2%, respectively.
Broadcom has plenty of cash flow to support its dividend, which it raised in December by 23%, to $3.25 a share. Free cash flow totaled $9.3 billion in fiscal 2019, ended in October, compared with $8.3 billion a year earlier.
For its fiscal quarter that ended on Oct. 31, Hewlett Packard Enterprise reported mixed results. Revenue fell 9% year over year, but profits rose 14%, to 49 cents a share. In its current fiscal year, HPE is expected to earn $1.86 a share, up 5% from $1.77 last year, on flattish revenue growth, according to FactSet.
That should be enough for HPE to boost its dividend in the mid-single digits—reassurance that some tech shares have a yield shield if the broader sector does have a selloff.
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