• Tue. Nov 24th, 2020

Dimancherouge

Technology

Looking for Dividends? These 3 Tech Stocks Are Great Buys

Looking for investment income? Focusing on yield alone means you’ll miss out on lots of quality companies that pay a smaller dividend, but are still growing and could increase the payout in the future. Looking for companies that check both boxes — dividend payment and growth — can create a powerful compound growth effect over the long term.

Three companies our Fool.com contributors think meet these criteria are Applied Materials (NASDAQ:AMAT), Dolby Laboratories (NYSE:DLB), and Broadcom (NASDAQ:AVGO).

An illustration of various tech devices and services shown in honeycomb shaped cells.

Image source: Getty Images.

Don’t pick just one tech theme when you can have many

Nicholas Rossolillo (Applied Materials): As 2020 has unfolded, I keep coming back to Applied Materials, and I see no reason not to again. The company makes equipment for semiconductor and other tech hardware manufacturing, and its engineering research lies at the heart of many important advancements in technology. Whether it’s high-end computing chips for things like AI, ultra-high-definition OLED screens, or the proliferation of network-connected devices, there’s a good chance AMAT has had a hand in the development and fabrication of the hardware. 

Like all businesses tied to manufacturing, though, AMAT is a cyclical operation. Sales ebb and flow and are sensitive to market demand — which often revolves around new advancements in tech and product upgrade cycles. After a year-and-a-half slump, the semiconductor industry is back on the rise this year as the pandemic has forced many organizations to start making some much-needed updates. AMAT’s sales and profits are thus on the rise as their partners revamp manufacturing lines for new demand. But shares still haven’t quite recovered to all-time highs, even though sales and earnings are well on their way toward reaching new records.  

AMAT stock currently trades for just 15 times expected adjusted earnings per share for the current fiscal year. And with management’s outlook that sales and adjusted earnings will grow 29% and 58% respectively at the midpoint of guidance in the current quarter, this looks like one cheap stock to me. The annual dividend yield currently sits at just over 1.4%, but only used up about a quarter of the company’s free cash flow generation (revenue less cash operating expenses and capital expenditures) this year. Add in share repurchases, and the total cash return to shareholders so far this year doubles the current dividend amount — with plenty of room for AMAT to grow the payout over time.

Paired with a solid balance sheet ($6.29 billion in cash and investments, $5.45 billion in debt) and a steadily growing business that will rise over the long term with whatever the current technology trend may be, this income stock remains one of my favorites.

Dividend growth in high definition

Anders Bylund (Dolby Labs): The fields of entertainment and technology have been moving closer to each other for decades. Dolby Labs stands at the very intersection of these important markets and is often seen directing traffic through the crossroads.

Dolby started paying dividends in 2014 and has been boosting its payouts without fail for the last five years. The dividend yield currently stands at 1.4%:

DLB Dividend Chart

DLB Dividend data by YCharts

The best part of Dolby’s steady payout growth is that it’s all powered by rising cash flows. In fact, only 30% of Dolby’s free cash flows were funneled into dividend payments over the last four quarters. The company has lots of headroom for further increases, even if the growing cash flow line treads water for a couple of years.

The Dolby Vision and Dolby Atmos technologies are important parts of many digital entertainment systems these days, both in portable devices and home theater setups. As the living room continues to take over the central role that was played by movie theaters and radio stations for many decades, Dolby’s financial results and stock prices should follow suit. Locking in the dividends at today’s modest share prices will pay off in the long run.

A safe 3.6% yield is hard to find

Billy Duberstein (Broadcom): Diversified chip conglomerate Broadcom, formerly known as Avago, is looking like a solid pick for income investors this fall. Headed by its aggressive but brilliant CEO Hock Tan, Broadcom has fashioned itself into a technology behemoth through several acquisitions over the past decade.

Avago executed the massive $37 billion acquisition of Broadcom in 2016, valuing the combined companies around $77 billion and taking Broadcom’s name. At today’s market cap of $148 billion, it’s clear the combined companies have delivered value for shareholders.

Most notably, that mega merger linked up two of the largest companies in communications semiconductors. Fast forward to today, especially to the COVID-19 pandemic, and communications services are of paramount importance across wired connections and next-generation 5G wireless communications.

Broadcom’s chips span controllers, custom application specific integrated chips (ASICs), WiFi and bluetooth chips, RF filters and modules, and many others, across devices including mobile phones, routers, data centers, and mainframes.

Not only is the company extremely diverse from a hardware perspective, but Broadcom also made a move into software, with the acquisitions of California Technologies in 2018 and Symantec cybersecurity software in 2019. Today, a little less than 25% of revenue comes from software, which evens out the ups and downs of the hardware cycle while also adding cross-selling opportunities.

Broadcom’s net income looks low and its valuation looks expensive at 69 times earnings, but generally accepted accounting principles (GAAP) vastly underestimate its actual free cash flow. That’s because Broadcom takes large amortization of intangibles charges as a result of all its past acquisitions, which isn’t a cash expense, but does lower the company’s tax burden.

While the company only recorded $688 million in net income last quarter, its free cash flow was just over $3 billion. That covered the company’s $1.3 billion dividend two and a half times over. While the company has about $44 billion in debt, that load seems relatively manageable given the company’s profitability.

Broadcom appears to be on track to make between $11 billion and $12 billion in free cash flow this year, which at a $148 billion market cap values the company between 12.3 and 13.5 times this year’s cash flow. That’s a very cheap price for a diversified dividend payer that’s well positioned to capitalize on the technology trends in 5G, IoT, and cloud computing over the next decade.

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