With interest rates falling, and dragging bond yields down with them, investors are seeking reliable sources of steady income. It’s a move that naturally draws them toward dividend stocks, but historically, the search for dividends has not drawn investors into tech. That has changed in recent years, as the tech giants have been offering better rewards for shareholders.
A little history will help. The tech industry feeds on growth, growth, growth – and so developed a habit of quickly reinvesting cash and profits into R&D and acquisitions. In the traditional tech view, paying dividends was a negative signal, that the company did not have an exciting initiative in which to invest. Growth would attract investors.
But in the last ten years, there has been a slow shift. Tech companies, especially the giants that lead the industry, have increased dividend payouts by 17%. Last year saw them return $88 billion to shareholders in the form of dividends. Apple and Microsoft led the way, paying back a combined $27 billion to their investors in 2018. We’ve used TipRanks’ Top Stocks page to find out which companies the best analysts are bullish on.
Apple, Inc. (AAPL)
From its small beginnings in Steve Jobs’ parents’ garage, Apple has grown to be one of the world’s largest companies. Last summer it was the first publicly traded company to break above a $1 trillion market cap, and its popular iPhone series has over 900 million installed users worldwide. The downturn in the final quarter last year, along with the ongoing maturation of the smartphone market replacement cycle, hit the company hard, and its share price fell 38% from its October 2018 peak to its trough on January 3.
Apple has rolled with the changing fiscal and product environments by shifting its emphasis to services and user base monetization. The company’s share appreciation this year – it is up 35% year-to-date, compared to the S&P 500’s 18% gain – is a sign that investors are confident in its ability to compensate for reduced iPhone revenues going forward.
Investors are confident, and Apple is rewarding them. The company resumed dividend payments in 2012, after a 17-year break, and quickly became a favorite with dividend investors. The yield is modest, at just 1.44%, but the high share price puts the current payment at $3.08 annually. And better, from an investor’s perspective, the company has committed to maintaining the dividend and has increased the payment more than 10% over the past five years.
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Looking forward, Apple is bullish ahead of today’s iPhone 11 launch event. The new smartphone devices are expected to show incremental improvements overall, and to fit in well with the current lineup. The new Apple Watch, however, is expected to show new features, including health monitoring apps, that are expected to put it in the spotlight. This is in line with the company’s shift from the iPhone to its other divisions. Wearables showed a record revenue increase in the last quarterly report.
Writing from JPMorgan, analyst Samik Chatterjee says, “The key watch points for tomorrow’s event will revolve around 2019 iPhone pricing, and announcements around other hardware products which have more opportunity to surprise relative to expectations.” He gives AAPL a $243 price target, with a 13% upside.
5-star analyst Timothy Arcuri, of UBS, agrees that Apple will stick to meeting expectations in today’s event. “We expect Apple to announce three new iPhones and a new Watch. The iPhone models are very similar to current models save for some general performance improvement and a materially better camera with more functionality. Overall, the Watch seems like more of a potential upside surprise given new health features.” Arcuri’s $235 target implies an upside of 10% for the stock.
Overall, AAPL keeps a Moderate Buy from the analyst consensus. This is based on 16 buys, 11 holds, and 1 sell set in the last three months. AAPL shares are selling for $214, with an average price target of $226, giving a potential upside of 5%. The current share price is only 6% lower than the company’s all-time peak of $228, reached in October 2018.
Microsoft Corporation (MSFT)
While Apple was first to reach $1 trillion in market cap, and Amazon (AMZN) was second, Microsoft has been the one to hold its value at that level. The software company first broke the trillion-dollar level in April of this year, and remained above ever since. The company’s current market cap is $1.046 trillion.
Building its success on the ubiquitous Windows operating system and its more recent move into cloud-based services, Microsoft offers income-minded investors the best of all worlds. Share price has consistently gained over the past fourteen years, and the company has simultaneously adjusted its dividend to steadily increase over the same time. The 1.34% yield is well below the S&P’s average of 2%, and the $1.84 annual payout won’t turn any heads, but it has developed a reputation for rock-solid reliability.
Top market analysts agree that Microsoft has stable upward momentum. From Mizuho Securities, Gregg Moskowitz writes, “MSFT hasn’t seen a slowdown in demand, usage trends or pipeline, other than some regional volatility in China. Data center trends continue to be strong, and management remains relatively optimistic about the PC demand environment over the next year or two.” His price target, $152, implies an upside of 10%.
KeyBanc’s Brent Bracelin is also bullish on MSFT. He notes especially that the company has just locked down a $7.6 billion contract with the US Department of Defense, to provide Office software for the Pentagon. He says, “We view some of these broader government modernization plans and cloud initiatives as another growth vector for Microsoft’s commercial cloud segment.” Bracelin gives MSFT a price target of $155, for a 12% upside.
Microsoft’s Strong Buy consensus rating is based on 21 buys, along with 1 hold and 1 sell. MSFT shares sell for $137 and have an average price target of $153, giving the stock an upside potential of 11%. Like Apple, Microsoft shares are up 35% year-to-date.
Broadcom, Inc. (AVGO)
By revenue, Broadcom is the sixth-ranked semiconductor company in the world by sales revenues, bringing in $18.46 billion in 2018. The company weathered last year’s Q4 downturn better than most tech companies, along with this past summer’s volatility. At the same time, Broadcom’s sales growth has been slower than some of its competitors – Intel’s growth from 2017 to 2018 was 14%, while Broadcom’s was just 4%.
Still, the company has held onto its relative position in its industry, and in recent weeks has seen a 7.3% jump share prices. Shares are closing in on $300, and this brings Broadcom’s biggest investor advantage into sharp relief: the company believes in rewarding shareholders. The dividend is already 3.62%, well above the S&P average, and is scheduled for an increase later this year. Factoring in the high share price, AVGO pays out $10.60 per share per year, giving this stock the one-two combination of high yield and high payout.
Mark Lipacis, of Jefferies, notes the company’s plans to increase the dividend, and expects to see a boost of 30% in December. He points out that this is in line with the Broadcom’s general policy of returning half of the annual free cash flow to the shareholders. Calculating from the fiscal year 2019 FCF estimate of $10.9 billion Lipacis expects the dividend to hit $13.72 annualized, which would put the yield at an impressive 4.9%. His dividend expectations make him naturally bullish on the stock, reflected in his $324 price target and 10% upside.
Loop Capital’s Cody Acree is also bullish on AVGO, based on the company’s broader prospects. He sets a $310 price target and writes, “We expect the company to maintain its cautious stance regarding its channel and OEM inventory trends along with expressing concern over the direction of end-market demand as a result of the macro-related uncertainties. We see Broadcom returning to sequential and annual growth in Q4…” His target implies an upside of 6%.
Broadcom maintains a Moderate Buy from the analyst consensus, with 22 buy ratings and 8 holds. Shares are selling for $293, and have an average price target of $312. The upside potential is 6.7%.
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