2 Attractive Dogs of the Dow

Mohsin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The fiscal cliff has been averted with the recent deal between the Republicans and Democrats. If the fiscal cliff had not been averted, we could have been in a middle of a big crisis, and the markets had been fretting for weeks over this impending doom. Therefore, this deal has significantly reduced the uncertainty in our financial markets.

However, despite this near miss, debt markets are still not in full flow due to various other macro-economic factors. In an environment like this, dividend play is a much better option for investors looking for a stable source of income. Dividends are not something usually associated with the technology industry, but there are a few companies in the technology sector which have a sustainable and attractive dividend.

<img src="http://media.ycharts.com/charts/48f737f66023daf20c6d1bfa99baca3a.png" />

INTC data by YCharts

Figure: dividend yield and price


Intel is currently the largest semiconductor company in the world. It was once the darling of the tech world and its ‘Intel Inside’ logo was literally everywhere. More recently, Intel’s stock has suffered by the fall of the PC and its own inability to capture the handheld market. Companies such as NVidia and Qualcomm currently dominate the handheld market, and there seems to be very little room for entry.

The company is trying to increase its insignificant share in the handheld industry (tablet/smartphone) by bringing its famous ‘Intel Inside’ campaign to handhelds. Motorola is the only company we know has signed up for ‘Intel Inside.' Intel also been focusing on its enterprise segment to stabilize falling revenues from PC segment, and so far, this strategy is working. As we can see below, the EPS and revenues have stabilized despite the falling demand in PC segment.

Intel has one of the highest dividends in the technology industry, with the annual forward dividend yield at 4.3%. The operating cash flow yield is 18.3%, which is way above the dividend yield. The debt situation is also sound with debt to equity at 14x, less than half the industry average.  

I believe there are no immediate catalysts which can compress the stock price. The bad performance of the PC industry is already priced in, and the market can also show a positive response to Windows 8. Microsoft (NASDAQ: MSFT) released its touch-based operating system a few months back. The market has been skeptical about the success of Windows 8, but Microsoft has launched more than 1,000 devices with Windows 8 and WP8, a lot of them with Intel inside.

If there is a positive response to Windows 8, it will be incorporated into the financial results from this quarter. Intel’s stock is currently trading at forward p/e of 11x and is trading 8% below its mean sell side target price of $23.08. At these levels the company not only offers a sustainable dividend yield but also significant capital gains.

<img src="http://media.ycharts.com/charts/1cb86d0b8d82208e1e7499e1dec13d73.png" />

INTC data by YCharts


AT&T is the largest telecom provider in the United States. The company reported $127 billion in revenues last year and the sell side is expecting revenues of $128 billion for 2013. The Street is also expecting EPS to grow by approximately 6%, with 2013 estimated EPS at $2.54.

The forward annual dividend yield of AT&T is approximately 5.1%, approximately 16% above industry average and the payout ratio is also way above the industry average. The company is generating solid cash flows from operations with operating cash flow yield at 18%.

As can be seen below, the high payout has weakened the cash situation of the company as compared to the industry. This can be mistaken as a weak balance sheet and thus unsustainable dividends. On the contrary, the price to FCF ratio is only 27% higher than the industry average, and the operating cash flow yield is also way above the dividend yield, which is another indicator that operations can easily finance the dividend. Therefore, despite a very high payout ratio, the cash situation of the company is still pretty stable and there is no immediate threat of a decrease in payout.

Table 1: AT&T Ratios from Reuters

<table> <tbody> <tr> <td> <p>Price to Sales</p> </td> <td> <p>1.58</p> </td> <td> <p>0.81</p> </td> <td> <p>1.22</p> </td> </tr> <tr> <td> <p>Price to Book</p> </td> <td> <p>2</p> </td> <td> <p>1.03</p> </td> <td> <p>1.48</p> </td> </tr> <tr> <td> <p>Price to Cash Flow</p> </td> <td> <p>8.8</p> </td> <td> <p>2.74</p> </td> <td> <p>7.42</p> </td> </tr> <tr> <td> <p>Price to Free Cash Flow</p> </td> <td> <p>28.49</p> </td> <td> <p>22.27</p> </td> <td> <p>13.78</p> </td> </tr> </tbody> </table>

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