The market is on a roll lately and why not? North Korea didn’t launch a missile at the US this week the Fed minutes gave new inspiration to traders while the US economy is being pumped with liquidity. There is a lot to like for many investors. Even the bears seem bullish on the very short term as we are seeing massing injections of liquidity from overseas markets. US stocks are strong and looking good, for now.
This market is even pushing defensive tech stocks with high dividend yields to highs for 2013. Intel, Microsoft and Cisco are all up big. For a long time these stocks have been considered safe places to park your cash and earn a yield. Microsoft and Intel have had very good dividend growth over the last 3 and 5 years while Cisco has only been paying dividends since 2011. Cisco looks dedicated to moving their payout higher but we’ll have to wait and see if that continues. The company just announced on March 28th that they were increasing the quarterly dividend again to $.17 per quarter which is almost a 300% increase from 2011. So is it time for these defensive stocks to move higher or is this move just temporary? Let’s take a look at the dividend fundamentals.
Intel
The yield at Intel is undeniably positive at 4.1% which is well above its 5 year yield average of 3.3%. The company has a payout ratio of just 42% and a free cash flow yield of 7.2%. Intel has increased its dividend for 10 consecutive years and has a 3 year dividend growth rate of 15.4% and a 5 year dividend growth rate of 14%.
The dividend feels safe, but what about income growth? We don’t know what the future holds, and really that is the question, but Intel has a 3 year net income growth rate of 36%. I believe Intel can continue to drive net income and grow its dividend but only time will tell. If the company can be successful then dividend growth alone will push this stock higher. Intel is down 20% over the last 12 months but is up 8% in 2013.
Microsoft
There are a lot of Microsoft haters out there but I am not one. The company continues to deliver results and is constantly expanding its product offerings to compete in new markets. MSFT started out 2013 trading at $26.17 per share and the dividend yield looked very attractive back then at 3.5%. Since then though the stock is up 13.3% and Mr. Softy now has a yield of 3.03%, which is still strong.
I personally don’t like Microsoft above $33 a share and the closer it gets to that price level the less I’m inclined to buy more. MSFT does have strong dividend growth of 18% over the last 3 years. That can only help drive the stock price higher if they keep it up.
Cicsco
Cisco’s brand feels like the oldest and most stagnant of out the three tech stocks we are discussing today to me. That may be a misconception on my part but they seem to be getting out done in many of their best markets lately. They are falling behind Microsoft in the UC space and their reputation just isn’t what it used to be. It’s great to see the company increasing its dividend and with a 30% payout ratio we can expect to see that trend continue. The 3.3% yield on Cicsco is nice and its backed by a three year net income growth rate of 9.4%.
It is possible that Cisco may increase its dividend by 15% just to match the payout ratios of Intel and Microsoft. That would give it a yield of 3.6%. From there the company might boost its dividend each year at a rate that is equal to its income growth. That would put Cisco right in the middle of both Microsoft and Intel. The question we need to answer is what does Cisco’s future hold and it may take another year or so to really be able to answer that question. That keeps me on the sidelines, far away from Cisco. So far the stock is up over 9% in 2013.
Conclusion
Yield seekers are out still out there. I’m not going to chase these stocks higher there may be enough global investors out there seeking safe yields that more money could flow into these large cap dividend stocks. Earnings season is here and the results these old tech companies produced in the first quarter could be catalysts for higher stock prices. Here are the earning reporting dates to watch for:
Intel: April 16th, after the market closes
Microsoft: April 18th, after the market closes
Cicso: May 15th, after the market closes
I own some MSFT and I’m a fan of the company. I know there are lots of haters but looking at the financials of the company, it seems MSFT keeps making tons of money despite what the haters say. The concern is the slowdown of personal computer sales but I don’t see MSFT going anywhere any time soon. I’ll continue to own, buy more on big dips, and collect my dividends until the financials of the company tell me it’s time to consider selling.
I think you are right Dan. The slowdown in PC sales is inevitable but MSFT has so many other revenue streams now besides Windows 8 sales that they will continue to boost net income for a long time to come.
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