TSMC and two other blue chip tech stocks pay big dividends while trading at low valuations.
Aug. 8, 2020
This article originally appears on The Motley Fool, written by Leo Sun.
Many investors buy tech stocks for growth instead of stable dividends. However, many tech stocks — including TSMC (NYSE:TSM), IBM (NYSE:IBM), and Broadcom (NASDAQ:AVGO) — offer high dividends and trade at low valuations. Let’s see why these three dividend-paying tech stocks could be worth buying today.
TSMC, the world’s largest contract chipmaker, manufactures chips for companies including AMD, NVIDIA, Qualcomm, and Apple (NASDAQ:AAPL). It doesn’t consistently raise its dividends, but it currently pays a forward yield of 3.6%.
TSMC spent over 100% of its free cash flow on dividends last year, which would usually be a red flag for an unsustainable payout. Yet a closer look at its business suggests its free cash flow growth will improve this year.
The company faced cyclical slowdowns in the digital consumer electronics (DCE), high-performance computing (HPC), and automotive markets last year. The sluggish smartphone market and its loss of Huawei’s ordersexacerbated that pain. But many of those headwinds are lessening.
New gaming console launches this year could boost the company’s DCE sales again, and the growing cloud and artificial intelligence (AI) markets are fueling fresh demand for HPC chips. Three other catalysts — Intel‘s 7nm chip delay, higher orders from AMD, and a tighter relationship with Apple — should offset TSMC’s weaknesses.
Analysts expect those tailwinds to boost TSMC’s revenue and earnings 28% and 34%, respectively, this year — robust growth rates for a stock that trades at just 25 times forward earnings.
IBM pays a generous forward dividend yield of 5.2%, and it’s raised its dividend annually for 25 straight years, making it a new Dividend Aristocrat of the S&P 500. It also spent less than half of its free cash flow on those dividends over the past 12 months.
Yet IBM’s stock remains down nearly 20% over the past 12 months, as the company’s lack of consistent revenue growth overshadowed its big dividends. IBM repeatedly tried to offset the slowdown of its legacy businesses with its higher-growth cloud businesses, but that turnaround has been sluggish.
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Analysts expect IBM’s revenue and earnings to decline another 4% and 14%, respectively, this year — which explains why its stock trades at only 11 times forward earnings. But investors are overlooking two potential catalysts: IBM’s acquisition of Red Hat, which significantly expands its footprint in the hybrid cloud market, and the promotion of Arvind Krishna, its cloud and cognitive software chief, as new CEO.
Krishna plans to streamline IBM’s business to focus on the hybrid cloud and AI markets, instead of going head-to-head with public cloud leaders such as Amazon.com. That slow but steady approach, which leverages IBM’s strength in enterprise hardware and software, could breathe fresh life into the aging company and surprise the bears.
Broadcom became one of the world’s largest chipmakers through a series of bold acquisitions, and it has raised its dividend annually for nine straight years. It pays a forward dividend yield of 4.2%, and it spent less than half of its free cash flow on those payments over the past 12 months.
Broadcom sells a wide range of chips for the data center, networking, broadband, wireless, storage, industrial, enterprise, and mainframe markets. It also diversified into the software market by buying CA Technologies and Symantec’s enterprise software unit.
Wall Street expects Broadcom’s revenue and earnings to rise 4% and 1%, respectively, this year. Those growth rates seem tepid, but the stock also remains cheap at less than 13 times forward earnings, and its long-term growth looks stable.
Broadcom’s industrial and enterprise markets could remain sluggish from COVID-19 disruptions, but the growth of its data center business should offset that slowdown. Demand for its smartphone chips, especially from its top customer Apple, could also accelerate in the second half of the year as new 5G handsets hit the market. Those incoming tailwinds, along with the stock’s high yield and low valuation, make it an attractive play for income investors.
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