Two Tech Opportunities with Dividends
Dave is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Two weeks ago, I compiled a list of Top 5 Tech Stocks for Fall 2012 (Baidu, F5 Networks, Rackspace, SalesForce.com, and Accenture). Two stocks that didn't make the list, but were close, were Intel (NASDAQ: INTC) and Cisco (NASDAQ: CSCO). These two stocks have been on the decline recently, so they're worth a second look for value investors.
A month ago, Intel lowered its revenue guidance as the economy remains weak and PC sales continue to slow. This announcement kicked-off a big decline in its stock value, as illustrated in the chart below.
Adding to Intel's bad news, Advanced Micro Devices (NYSE: AMD) cut its Q3 guidance significantly and announced that it is considering cutting up to 20% of its workforce. AMD is a chief competitor of Intel, particularly in the PC market. To be fair to Intel, AMD has generally been runner-up to Intel's dominance. However, AMD's warning serves as further confirmation of the chipmaker industry's general struggles right now.
That being said, let's look at what else Intel has to offer. Many investors see Intel as purely a PC chip play, and it’s true that the PC market did comprise $8.7 billion of the $13.5 billion in revenue that the company reported in Q2. However, Intel has been able to mitigate the PC slowdown by working its way into other areas.
For example, its data center revenue reported in Q2 was $2.8 billion, up 14% sequentially. The company is also trying to get some traction in the smartphone and tablet space, but that will likely be difficult, especially with the already established competition. Intel also purchased McAfee last year to improve its product offerings by being able to layer in the ever-increasing need for security.
All of this leaves us with a company that
- Is now growing in the low-to-mid single digits
- Has steady margins
- Has a P/E of 9.1
- Provides a 4.2% dividend yield
On that last point, take a look again at the chart from earlier. We haven't seen a dividend yield this high from Intel in recent history. However, we saw a similar pattern around this time last year, and eventually the company’s stock rose around 30%. I think we'll see the same end result this time.
The concerns about Intel are certainly warranted, but all the bad news seems to be priced into the stock. Intel remains an innovative company with plenty of intellectual property to continue building upon. There is only so far Intel's stock will drop while it offers a 4%+ dividend.
If you're looking for a company that seems to have already started its turn-around after slumping, look at Cisco. In August, Cisco reported full-year results with year-over-year increases of 7% for revenue and 27% for earnings. One of the keys to its future is that its larger sources of revenue (switching & routing) are holding steady and growing slowing while other lines of business (video, wireless, security & data center) are growing rapidly.
What's even better is that Cisco also announced its intention to return at least 50% of free cash flow to investors annually through dividends and share repurchases. Cisco provides its investors with a 3.1% dividend, a new concept for what historically has been a more growth oriented company. Combine that with a 12 P/E from a steady business and you have a good recipe for long-term dividend income and capital appreciation.
While neither company generates the super growth rates like they used to (law of large numbers makes it tough), both Intel and Cisco have mid-single digit revenue growth, smaller lines of business with opportunities for faster growth, and large dividends that allow investors to be patient and wait for the stock price to rise over the long-term.
Interested in Additional Analysis?
Cisco Systems has had a lot of movements both up and down, but is today's rise a sign of further gains to come? Get the answers you need in the Fool's latest premium report on Cisco, which provides our latest analysis along with a year's worth of free updates to take you well into the networking giant's future. Click here and start reading today.
Zaegs owns April 2013 call options in Intel. The Motley Fool owns shares of Intel. Motley Fool newsletter services recommend Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.