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With the Nasdaq hovering near all-time highs, many tech stocks can’t be considered cheap. Most high-growth tech companies also don’t pay dividends, since they usually reinvest their cash into their expanding businesses.
But for investors who favor stability and income over high-risk growth, there are still plenty of tech stocks that pay high dividends and trade at low valuations. Let’s take a closer look at two companies that fit that description: Broadcom (NASDAQ: AVGO) and IBM (NYSE: IBM).
Broadcom sells a wide range of chips for the data center, networking hardware, storage, broadband, wireless, and industrial markets. It also expanded into the infrastructure software market with its acquisitions of CA Technologies in 2018 and Symantec’s security business in 2019.
Broadcom’s stock rallied about 20% this year as the strength of its infrastructure software unit offset the pandemic-related disruptions of its semiconductor business. Its total revenue rose 4% year over year in the first nine months of 2020, but its adjusted EPS dipped 1% – mainly due to the costs of integrating Symantec’s security business.
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Broadcom’s sales of networking and broadband chips also stabilized sequentially in the second and third quarters, as cloud and telecom customers upgraded their infrastructure to address the surge in online activity throughout the pandemic. Analysts currently expect Broadcom’s revenue and earnings to rise 6% and 3%, respectively, for the full year.
But looking into 2021, analysts expect Broadcom’s revenue and earnings to rise 9% and 16%, respectively, as the pandemic passes and the expanding 5G and cloud markets lift sales of its networking and wireless chips. Broadcom also generated a fifth of its revenues from Apple (NASDAQ: AAPL) last year, so it should benefit from robust sales of the iPhone 12 over the next few quarters.
Broadcom has a well-diversified business, a wide moat, and its stock trades at just 15 times forward earnings. It currently pays a forward dividend yield of 3.4%, and it plans to spend about half of its free cash flow (FCF) on dividends every year. It spent 48% of its FCF on its dividend over the past 12 months – which indicates its dividend remains rock-solid even as other companies cut or suspend their payouts.
IBM became a Dividend Aristocrat of the S&P 500 earlier this year after raising its dividend for the 25th straight year. Unfortunately, joining that elite group didn’t prevent IBM’s stock from dropping 14% this year as investors lost patience with its sluggish turnaround efforts.
But three significant things recently happened at IBM. First, IBM acquired the open source software provider Red Hat in July 2019. That acquisition expanded its hybrid cloud business, which allows companies to store their data on both public cloud platforms and on-site private clouds.
Second, Arvind Krishna, IBM’s cloud and cognitive solutions chief, succeeded Ginni Rometty as its new CEO in April and immediately focused on expanding its higher-growth cloud businesses.
Lastly, Krishna recently revealed IBM would spin off its slow-growth IT services segment into a new company that prioritizes the growth of its hybrid cloud and AI businesses. That spin-off won’t happen until late 2021, but it indicates IBM is finally streamlining its sprawling business and focusing on growing its revenue again.
For now, IBM’s growth looks anemic. Analysts expect its revenue and earnings to decline 4% and 34%, respectively, this year, as the ongoing pandemic throttles the growth of most of its non-cloud businesses.
But looking ahead into 2021, analysts expect IBM’s revenue and earnings to rise 1% and 38%, respectively, as the pandemic passes. After IBM spins off its IT services segment, which constantly erases the growth of its cloud-based businesses, its growth should accelerate significantly in 2022 and beyond.
IBM’s stock won’t blast off anytime soon, but it trades at just 10 times forward earnings and pays a meaty forward dividend yield of 5.7%. It’s unclear if the “new” IBM will remain a Dividend Aristocrat after its upcoming split, but the company has said that both new companies will pay a combined quarterly dividend that is “no less” than IBM’s current dividend.
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