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A Strong Balance Sheet Could Lead to Better Returns

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With strong balance sheets, these companies are well-positioned to deliver returns through share repurchases, dividend increases and mergers and acquisitions. In fact, some activist investors have been pushing them in this direction, and share buybacks by S&P 500 tech companies started to accelerate in 2014.

These mature companies have also shown responsibility in taking on debt, so they should be less vulnerable to the anticipated rate hike by the Federal Reserve.

stronger balance sheet could lead to better returns

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Market Realist – Stronger balance sheets could bring better returns to investors

Dividend yield is a ratio showing how much a company pays out in the form of dividends each year relative to its share price. Dividend yield is an important part of a stock’s total returns.

The graph above shows the dividend yields of the top tech stocks as well as of the S&P 500 (SPY)(IVV).

IBM (IBM) is one of the highest-dividend-paying companies among mature tech companies, with a dividend yield of 2.67%. Intel (INTC) and Microsoft (MSFT) have higher dividend yields than the S&P 500. Apple (AAPL) and Oracle (ORCL) each have lower dividend yields than the index.

Given the strength of their financial positions, these companies can—among other things—afford to pay a higher dividend, buy back shares, or invest in capital expenditure. The next part of this series will look at the latter.

A higher dividend yield is likely to make a company’s returns more stable, as a larger portion of them would come from dividends. A share buyback would lower the denominator, leading to higher return on equity.

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