One of the most interesting stories last week involved a public debate about the best way for Apple (AAPL) to return some of its massive cash hoard to shareholders. What's interesting about this public fight over Apple's dividend is not just that the firm is so widely held or that its share price has been under pressure during the last few months. It is important because it talks to an increasing dilemma that many firms (in tech and elsewhere) have right now: Growing cash balances that are earning next to nothing.
As our director of technology research Grady Burkett pointed out a few weeks ago, the top 10 tech firms we cover have increased their cash balances by 27% during the last year to $250 billion. And he expects that outside of a few small acquisitions, that cash is going to be used to ramp-up stock buybacks and dividends.
Hedge fund manager David Einhorn is looking to get some of that cash sooner rather than later. He sued Apple on Thursday to stop a shareholder vote on making it more difficult for the firm to issue preferred shares. Einhorn has been advocating the firm issue these shares to existing shareholders as a way to deploy some of the firm's excess cash. Apple management has demurred on that proposal but did issue a statement saying that the firm is in "active discussions about returning additional cash to shareholders." Our Apple analyst Brian Colello thinks this isn't just a statement to placate Einhorn and that the per-share dividend could ramp up to $3.90 a quarter by 2017.
The fact that tech company boards seem to be increasing their commitment to returning capital to shareholders instead of hoarding cash is welcome news to income investors. Dividends from traditionally high-yielding sectors such as financial-services have been under pressure since the credit crisis as banks worked to rebuild their capital cushions and regulators tamped down on payments. This has made it harder and harder to find solid dividend payers. As cash-rich tech companies continue to grow, mature, and adopt more shareholder-friendly capital-allocation practices, they will create new fertile hunting ground for dividend investors.
We used the Premium Stock Screener to find some good tech dividend options. We screened for firms that have a yield above the S&P 500 index's, that were fairly valued or undervalued, and that had a track record of increasing dividend payouts. We also screened out firms that have payout ratios of 50% or less to reduce the chances of a dividend cut. We also restricted our search to firms' that have at least a narrow economic moat. These are the companies we want to own over the long haul because they have sustainable competitive advantages that will allow them to earn an economic profit over time. Given the strong recent performance of the market, there are only a handful of firms that pass this screen right now, and none looks tremendously cheap. But the screen does reveal some interesting ideas for investors to keep on their radar screens in the case of a pullback. You can run the screen for yourself by . Below are three names that passed.
Intel (INTC)
4 Star | TTM Dividend Yield: 4.25% | Economic Moat: Wide | Fair Value Uncertainty: Medium
From the Premium Analyst Report:
Intel is the dominant force in the roughly $30 billion computer processor market. It has benefited tremendously from the proliferation of personal computers in the past few decades. Intel has long held the lead in microprocessor technology and performance, while Advanced Micro Devices (AMD) has mostly been an also-ran. Although AMD has emerged periodically as a threat, such occurrences are few and far between. After being caught off-guard several years ago when AMD narrowed the competitive gap between the two firms, Intel has gone on an impressive streak of outinnovating its smaller foe while reasserting its stranglehold on the microprocessor market.
Microsoft (MSFT)
4 Star | TTM Dividend Yield: 3.04% | Economic Moat: Wide | Fair Value Uncertainty: Medium
From the Premium Analyst Report:
Although the conventional wisdom regards Microsoft as a technology giant in decline, we see glimmers of a more cohesive strategy through new Windows. Microsoft has been a step behind as competitors and new technologies have slowly eroded the moat around its Windows PC operating system. We believe Microsoft's new multiprong strategy to compete in the world of cloud computing and mobile devices should help rejuvenate its Windows OS and software franchise by creating a more cohesive user experience among multiple devices, which should strengthen the links among the users, the OS, and the application software.
KLA-Tencor (KLAC)
3 Star | TTM Dividend Yield: 2.64% | Economic Moat: Wide | Fair Value Uncertainty: Medium
From the Premium Analyst Report:
KLA-Tencor occupies a sweet spot in the chip-equipment industry because of its dominant position in the process diagnostic and control, or PDC, market. Chipmakers use PDC tools to measure and detect defects during semiconductor production and to identify and correct the problem sources; this lowers costs by reducing the number of faulty chips produced. Customers rely on KLA's tools to accelerate manufacturing to full production of new chip designs and factory startups, as well as to maintain high yields for devices already in production to maximize profitability.