Published by Bob Ciura on April 16th, 2017
The technology sector is a surprisingly good source of dividend stocks.
This wasn’t always the case. During the heyday of the tech sector, hardly any tech stocks paid dividends at all.
But after the tech bubble burst, investors began pushing for technology companies—many of which have high cash flow and huge amounts of cash on their balance sheets—to pay dividends.
Two of the highest-yielding stocks in the Dow Jones Industrial Average are Cisco Systems (CSCO) and Intel Corporation (INTC), both of which hail from the tech sector.
Neither Cisco nor Intel is a Dividend Achiever, which is a group of 265 stocks with 10+ years of consecutive dividend increases.
You can see the full Dividend Achievers List here.
That said, Cisco and Intel are both highly profitable companies, with leadership positions in their respective industries.
However, Cisco is in a stronger position right now. This article will discuss three reasons why Cisco is likely to be the better dividend growth stock moving forward.
Reason #1: Stronger Growth
Both Cisco and Intel are experiencing a slowdown in growth, but for different reasons.
In the most recent fiscal quarter, Cisco’s revenue fell 2% year over year. The company expects full-year revenue in a range of flat to down 2%.
This is a weak forecast, but it is worth noting that unfavorable currency exchange is largely to blame. Cisco generates more than 40% of its annual sales from international markets.
Operationally, Cisco is struggling from stagnation in two of its core product categories, routing and switching. Routing and switching revenue fell by 10% and 5% last quarter, respectively.
However, Cisco is effectively managing costs. Margin expansion has fueled strong earnings growth in the past two years.
Source: 2016 Annual Report, page 6
Cisco’s earnings-per-share have increased 19% per year since 2014.
On the other hand, Intel’s earnings-per-share declined 9% in 2016.
Going forward, I expect Cisco to continue outperforming Intel, because Cisco is better positioned in the Internet of Things, or IoT.
The IoT is an attractive new market for tech companies. According to industry research firm Gartner (IT), Gartner, the number of connected devices in use around the world will quadruple, to over 20 billion, by the end of the decade.
Cisco is in a great position to capitalize on the IoT going forward.
As the world’s largest routing and switching company, Cisco is directly involved in all aspects of networking. Its technology facilitates smooth functioning of traffic, which will be critical to data and the IoT.
Intel is also active in IoT, but its progress has been slow. Its IoT revenue increased 16% last year, but the IoT represents just 12% of the company’s total revenue.
Of greater concern, is that Intel continues to be weighed down by its huge PC business. Semiconductors, especially for PCs, have stagnated, due to declining global PC shipments.
Put simply, the best days for the PC are behind it. Going forward, Intel will have a difficult time producing growth, even with its data centers and IoT businesses putting up strong growth.
That’s because PCs still make up more than half of the company’s total revenue. This will only serve as an anchor in the years ahead.
Reason #2: A Better Balance Sheet
Both Cisco and Intel are making acquisitions to derive growth in new markets, but again they are taking different approaches.
Cisco is pursuing relatively smaller, but more frequent, acquisitions than Intel. Cisco made 12 acquisitions in 2016, and has made more than 190 acquisitions in all.
In 2017, Cisco acquired AppDynamics for $3.6 billion. AppDynamics’ software is used across several industries, including financial and retail companies, improve performance of thier corporate networks.
To supplement its internal investments in IoT, Cisco recently acquired Jasper Technologies for $1.4 billion.
Jasper makes software that allows businesses to manage all sorts of connected devices, from vehicles to vending machines.
Intel made a huge splash earlier this year, when it acquired Mobileye for $15 billion. This is a major push into autonomous vehicles.
Source: Mobileye Acquisition Presentation, page 4
In 2015, Intel closed on another huge deal–$16.7 billion for Altera.
While it is understandable why Intel would want to make transformative deals to quickly cure its growth problems, it may be over-reaching.
For example, in 2014 Altera generated sales of $1.9 billion and net profit of $472 million. Intel paid 9 times sales and 35 times net earnings for Altera, a fairly high valuation.
The Mobileye deal was even more aggressive: Mobileye had GAAP net income of just $108 million last year, and sales of $358 million for the year.
The $15 billion deal values Mobileye for 40+ times sales, and 140+ times earnings.
One of the dangers of paying such huge acquisition premiums, is the risk of drastically overpaying. If the acquired company does not grow to meet the huge multiples paid by the acquirer, it could result in a huge goodwill impairment later on.
There is a lot of promise in new technologies, but smaller bolt-on deals—the type that Cisco is pursuing—could be more effective.
Cisco’s more modest deals have left its balance sheet in much better shape.
It ended the most recent fiscal quarter with $71 billion in cash and investments. This makes up approximately 43% of Cisco’s market cap.
Intel has $8.8 billion in cash and equivalents, and another $6.2 billion in long-term investments. Its $15 billion in total marketable securities represents 9% of Intel’s market capitalization.
As a result, Cisco still has plenty of flexibility to pursue future acquisitions, while Intel does not have much ammunition left.
Reason #3: Higher Dividend Yield & Dividend Growth
Lastly, Cisco is a more attractive stock than Intel, because of its higher dividend yield and dividend growth.
Cisco has a current dividend yield of 3.5%, while Intel has a 3% dividend yield.
This is a meaningful difference—investors can earn roughly 17% more dividend income this year by buying Cisco instead of Intel.
And, this difference could only grow over time, as Cisco has proven to be a much stronger dividend growth stock.
Cisco raised its dividend by 11% this year, while Intel’s
Over the past five years, Cisco has increased its dividend by 29% per year, on average. Intel’s five-year dividend growth rate is just 4% per year.
Intel and Cisco have both struggled to expand beyond their core competencies in recent years. Each have targeted the IoT as a core strategic area moving forward.
However, Cisco appears likely to have more success than Intel. Intel’s exposure to the PC is likely to be a bigger weight than Cisco’s exposure to routers and switching.
And, Cisco still has plenty of financial wiggle room to continue making acquisitions and internal investments as necessary to adapt.
With Intel’s two massive acquisitions, it may be tapped out, and unable to pursue meaningful future acquisitions.
Cisco’s stronger growth potential, higher dividend yield, and stronger balance sheet, make it the better dividend stock to buy.