Wednesday, March 25, 2009

Opportunities for Technology Dividends

Standard and Poor's "S&P North American Technology Sector Index" (henceforth referred as Tech index) is widely used to benchmark the technology sector in North America. As of February 2008 the Tech index had a weightage of approximately 20% to 23% in overall S&P500 index.

The Tech index represents different sub sectors that include hardware (20 companies), internet (21 companies), multimedia networking (27 companies), semiconductors (43 companies), services (31 companies), and software (40 companies). This is a total to 182 companies in the Tech index. However, similar to any market capitalization based index, Tech index is also top heavy. The cumulative weightage for top 10 companies is approximately 64%, for top 20 companies it is approximately 79%, while top 30 companies it is approximately 86%. The table below shows top 30 companies including the annual per share dividends. There are 17 companies out of top 30 companies that pay quarterly dividends.

(click to enlarge)

In general, the notable positive characteristics of tech titans are free cash flow, low level of debt (zero in many cases), higher gross margins, and cash on balance sheet. In this first group, the prominent one are that have paid consistent dividends. These include AT&T (T), International Business Machines (IBM), Verizon (VZ), Automatic Data Processing (ADP), and Paychex (PAYX). These companies have demonstrated sustainability of dividends and growth of dividends over a period of time. Keen observer will note that these companies are from services sector. All type of dividend investors know these companies very well.

In addition, the second group consists of notable tech titans that have paid or started paying small amount of dividends in last few years. These are Qualcomm (QCOM), Intel (INTC), Microsoft (MSFT), Hewlett and Packard (HPQ), Texas Instruments (TI), and Master Card (MA).

Contrarily, there are few other companies that have not had any favorable dividend policy. The argument for no dividends has been that they need cash for continued innovation and growth. In this third group, the prominent ones that have not paid dividends are Cisco (CSCO), Apple (AAPL), Google (GOOG), Oracle (ORCL), EMC Corp (EMC), eBay (EBAY), and Dell (DELL). Keen observer will note that majority are these companies are from hardware sector.

First group: These companies have demonstrated favorable dividend policy. If not all, then for most of the companies, pricing have come down to an attractive level.

Second group: These companies are the ones that have potential to become dividend champions (and may be dividend aristocrats). The most promising ones are Intel (INTC), Qualcomm (QCOM), and Master Card (MA).
  • Intel: Its technological-driven market leadership is so high that it just does not have any significant competitor. It still continues its hunger for more product diversification such as netbooks, WIMAX, etc.
  • Qualcomm: Its CDMA technology provides a stable royalty based cash flow, its chipset in CDMA and 3G domain is market leaders, attempting to diversify in netbooks with new platforms, and chipset competitors (Freescale, Infineon, TI, et. al.) falling apart. It would be prudent to say QCOM is soon becoming Google of wireless communication.
  • Master Card: Its service based business model and world wide reach makes it a potential dividend investments.
  • Microsoft: I did not include it because I am wary of its habit of squandering cash in meaningless acquisitions.
Third group: At the time of this writing, Oracle declared its first dividend. In addition, one other company to watch out for start of dividends is Cisco. It's chief executive has shown some inclination to start paying dividends. Apple and Google have not shown any inclination to pay dividends. Dividend investors will have to wait and watch until companies in this group have shown some consistency and sustainability.

The first group and second group are where dividend opportunities exist for long term dividend investors.

This article was written by Dividend Tree. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

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