Tech stocks have been on a roll in 2019. As we get closer to 2020, let’s take a look at the companies to consider for the next year. We have seen that the broader markets are trading at record highs despite several macro-economic concerns.
The trade war remains unresolved while developed economies such as the US and Europe are showing signs of a slowdown. With several economists predicting a recession next year, it would be advisable to invest in income-generating dividend-paying stocks. Here, we look at three tech stocks that might be attractive for income investors.
Cisco underperformed tech stocks this year
Cisco (CSCO) underperformed the broader markets, peer tech stocks, and ETFs in 2019. The stock gained just over 2% YTD (year-to-date). Comparatively, the Technology Select Sector SPDR Fund (XLK) is up 42% this year.
Cisco has been grappling with lower enterprise tech spending that impacted the top line this year. In its fiscal Q1 2020 with the year ending in July, Cisco reported revenue of $13.2 billion with EPS of $0.84. This was above consensus revenue estimates of $13.09 billion and earnings estimates of $0.81.
However, in the January quarter, Cisco forecast EPS growth between $0.75 and $0.77, which is below consensus estimates of $.79. Also, Cisco estimates a revenue decline of 2% in the second quarter. The company attributes it to a challenging macro-environment.
Cisco transitions to subscription, repurchases shares
Cisco, like most other software companies, is looking to transition towards a subscription-based business model. In the October quarter, subscription sales accounted for 71% of software revenue. This shift will help the firm offset a part of business cyclicality resulting in a steady flow of revenue even in a downturn.
Cisco pays a quarterly dividend of $0.35, indicating annual payouts of $1.4 per share. This amounts to a dividend yield of 3.2%. In the October quarter, Cisco paid dividends of $1.48 billion to shareholders and also repurchased shares worth $768 million.
In fiscal 2019, Cisco repurchased shares worth $4.45 billion. Also, Cisco has increased its dividends in the last eight consecutive years. In the last three years, dividend payments have increased at an annual rate of 12.2%.
It has a debt balance of $19.6 billion and operating cash flows of $15.6 billion. The company has a dividend payout ratio of around 50%. So, Cisco has enough reserves to pay back debt, increase dividends and buybacks in 2020.
Intel has a dividend yield of 2.3%
Shares of the semiconductor heavyweight Intel (INTC) are trading at $56.81. The tech stock gained just over 20% YTD and has performed in line with the Dow Jones Industrial Average (DJIA). However, Intel is trailing several peer semiconductor tech stocks in terms of market returns this year.
Semiconductor ETFs like VanEck Vectors (SMH) and iShares PHLX (SOXX) returned 52% and 49%, respectively, in 2019. Intel shares recently gained momentum after its Q3 results. The company reported revenue of $19.2 billion, above consensus estimates of $18.05 billion. Also, its earnings of $1.42 were above estimates of $1.24. Revenue growth was driven by a strong performance of its data-centric business.
Intel is optimistic about delivering record sales in the December quarter as well. In 2019, the company forecast sales of $71 billion, $1.5 billion above its previous forecast. This was also above the consensus estimate of $69.43 billion. Intel forecast adjusted EPS at $4.6 above estimates of $4.39.
Intel pays more dividends
Also, Intel pays a quarterly dividend of $0.315, indicating annual payouts of $1.26 per share. This amounts to a dividend yield of 2.3%. In the September quarter, Intel paid dividends of $1.4 billion to shareholders and also repurchased shares worth $4.5 billion.
Intel has increased its dividends in the last four consecutive years. In the last three years, Intel’s dividend payments have increased at an annual rate of 6.6%. Intel’s board of directors approved a share buyback program worth $20 billion.
The company has a debt balance of $29.5 billion and operating cash flows of $30.1 billion. With a dividend payout ratio of around 30%, Intel has considerable reserves to pay back debt and increase dividends and buybacks in 2020.
AT&T has been a winner among tech stocks this year
Telecom giant AT&T (T) returned 30% in 2019 and has outperformed several large-cap tech stocks this year. It generates revenue primarily from the mature telecom business. In the third quarter, AT&T reported sales of $44.5 billion. However, this was below consensus estimates of $45 billion. Its adjusted earnings of $0.94 were above estimates of $0.93.
In fiscal 2020, AT&T forecast sales growth between 1% and 2% while analysts have estimated this growth at 0.4%. The company forecast earnings between $3.6 and $3.7, above Wall Street estimates of $3.62.
HBO Max may boost AT&T even higher
Though its DirecTV losses peaked in the third quarter, AT&T is optimistic about the growth of HBO Max, its upcoming streaming service. With a strong portfolio of content under its belt, HBO Max will be priced at $14.99 per month. AT&T estimates subscribers to grow to 50 million within 5 years, which will result in annual revenue of over $8 billion.
Similar to other streaming services, AT&T will invest $1.5 billion to $2 billion in producing original content. This figure stands at $1 billion each for 2021 and 2022. Also, HBO Max will launch in May 2020.
AT&T pays a quarterly dividend of $0.51, indicating annual payouts of $2.04 per share. This amounts to a healthy dividend yield of 5.3%. Also, AT&T has increased its dividends in the last 34 consecutive years. In the last three years, its dividend payments increased at an annual rate of 2%.
Will tech stocks move higher in 2020?
While dividend payments remain attractive for investors, they can also benefit from an increase in the company’s stock price. According to analysts’ average target estimates, T stock is currently trading 2.1% below its target estimates. Comparatively, Cisco and Intel are trading at discounts of 19% and 0.5% respectively to consensus price targets.