With their hunger for cash to grow their businesses, tech firms aren’t typically considered income vehicles.
None of the four fabled FANG stocks— Facebook (FB), Amazon.com (AMZN), Netflix (NFLX), and Alphabet (GOOGL)—pay any dividends at all.
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But plenty of mainstays of the technology business do, and they’ve been able to grow those disbursements recently, thanks to strong earnings and free-cash-flow trends.
Microsoft (MSFT), for example, this week declared a quarterly dividend of 46 cents a share—a 9.5% increase and the latest in a steady stream of gains by the enterprise software and cloud-services giant.
“You’ve seen a lot of these big companies mature in their life cycle, and part of it is that as they mature, how they allocate capital changes a little bit,” says Mike Barclay, co-manager of the Columbia Dividend Income fund. “They are not growing as fast, and that’s when they should return capital to shareholders.”
Although their histories and businesses differ, the six companies in the accompanying table are all major tech players paying dividends that bear watching by investors.
IBM (IBM) paid its first dividend in 1913, two years after its founding, while the other five kicked off payouts in the later 20th or early 21st century.
One of them, Apple (AAPL), initially paid a quarterly dividend starting in 1987 but stopped in early 1996. It resumed in 2012, encouraged by investors watching how much cash it was amassing. Microsoft launched its dividend in 2003, Oracle’s (ORCL) came in 2009, and Cisco Systems’ (CSCO) arrived in 2011. Intel’s (INTC) disbursement dates to 1992.
Last year, the chip maker paid $5.1 billion in dividends, with a 3% hike over 2016, and the company has announced a 10% per share increase for this year. It yields 2.6%.
The yields on some of these stocks aren’t as appealing as Intel’s. Apple, Microsoft, and Oracle were recently at 1.3%, 1.5%, and 1.5%, respectively—well below the 1.8% average for the S&P 500 (.SPX).
But there’s more to income investing than the yield figure, particularly for technology companies, whose fortunes—and stock prices—can vary widely over time.
“When you think about dividends as a source of income, you want that income to go up over time,” says Barclay, whose top 10 holdings include Apple, Microsoft, and Cisco. “Focusing on the yield itself can sometimes not tell the story.”
He points out that Apple and Microsoft shares have done very well recently, pushing their yields down. Apple has returned 40.6% in the past year, dividends included, and Microsoft has notched a return of 54%. Intel has returned 29%, and Cisco has returned 51%.
Of course, just because a large company pays a dividend isn’t necessarily a buy signal.
“Even with these companies that do pay dividends, you can still see huge divergences of stock performance based on the market’s assessment of the company’s longer-term business prospects,” says Josh Spencer, portfolio manager of the T. Rowe Price Global Technology fund.
Paying a dividend “is good,” he adds, “but it isn’t going to save you.”
The stocks of both Oracle and IBM have faltered recently. IBM sports a yield of 4.2%, the highest among the six. Although its core business continues to drag, IBM’s second-quarter revenue for infrastructure services, which focuses on corporate information-technology needs, returned to growth with a 1% increase as more clients moved to the cloud. Earlier this year, IBM increased its quarterly dividend by 4.6%, to $1.57 a share.
Oracle is trying to catch up with peers such as Amazon in its cloud business. The company’s CEO, Lawrence Ellison, told analysts during an earnings conference call this week that its cloud infrastructure technology “will allow us to gain market share” rapidly. The stock yields 1.5%.
Although Microsoft sports a lower yield than some of the other companies listed, its fundamental businesses have been strong.
Microsoft, says Barclay, “is a company that has really, in some ways, come back from the dead. Five years ago, people were calling for the company’s demise.”
But under Satya Nadella, a longtime Microsoft employee who became CEO in early 2014, the company has grown into a major player in cloud computing and has put more emphasis on subscription sales in product areas like software. It also boasts a strong balance sheet and healthy cash flow, important underpinnings for dividend growth.
As of June 30, its net cash from operations totaled $43.9 billion over the previous 12 months, up from $39.5 billion a year earlier. To help fund its growth, the company is making a lot of capital expenditures. “They do need to build facilities to host the hardware for the cloud business,” says Barclay.
In the year ended June 30, Microsoft spent $11.6 billion on additions to property and equipment, up from $8.1 billion previously.
“We view capital return as a meaningful component of total shareholder returns,” the company’s chief financial officer, Amy Hood, said at an investor conference earlier this month.
Resurgent Microsoft doesn’t exactly fit the mold of a mature company whose growth trajectory is fading, though its earnings were flat in 2014 and 2015. Analysts expect the company to earn $4.26 a share this fiscal year, which ends next June, up from $3.88 last fiscal year and $3.31 previously.
Analysts are looking for the company to throw off nearly $37 billion of free cash in the current fiscal year, up from $32.3 billion last year, according to FactSet. Free cash is essentially operating cash minus capital expenditures. Those proceeds can be invested in the business, used for mergers and acquisitions, retained to bolster cash holdings, tapped to pay down debt, or returned to shareholders.
Tech hardware stocks to watch
Apple has been able to grow its dividend at a healthy clip, as well. In May, it declared a quarterly disbursement of 73 cents a share, up 16% from 63 cents.
The company ended its most recent quarter with $243.7 billion in cash and marketable securities.
Its stock yields 1.3%, the lowest among the six companies, but “Apple has shown an ability to extend the life cycle of its iPhone a lot longer than people might have thought,” says Spencer.
Apple, Microsoft, and other large multinational companies can also bring back cash from overseas at a lower tax rate than was allowed before—owing to the federal tax legislation passed late last year.
That should help support more dividend hikes for these companies.
Still, caution is warranted for tech dividends.
“It’s good for these companies to pay dividends, but the fundamentals trump everything,” says Spencer.
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