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The Two Best Dividend Stocks To Buy In The Tech Sector

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By: Larry Darrell
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Microsoft

Microsoft, the world’s largest software maker by revenues, has paid dividends since 2003. It is believed to be a dividend haven, considering its sustained growth in payouts to investors.

Microsoft has recently restructured itself as ‘One Microsoft’. After the shake-up, the management wants to focus on major technology trends such as big data, cloud services and mobile devices. It has already acquired Nokia’s handset business, which accounts for 81% of its Windows Phone sales. With the acquisition, Microsoft hopes to increase its share in the smartphone market to 15% by 2018. It also estimates that Nokia’s businesses will bring in $2.3-4.5 billion annually in operating income.

In the cloud services arena, Microsoft’s office 365 has an annual run-rate of more than $1.5 billion, and more than 350% growth in its seats. Windows Azure, its cloud services offering, is growing at a rate of 200%, with more than 50% of the Fortune 500 companies already using it. Owing to stellar growth in these areas, Microsoft has raised its capex guidance from $5.6 billion to $6.5 billion in 2014. The increased capex will go towards ramping up cloud services.

Microsoft had five-year average revenue and EPS growth rates of 5.2% and 6.7% respectively. Analysts project Microsoft’s future EPS to grow at its historical average of 6.7% till 2016. Its operating cash flows had a five-year CAGR of 5.9%, while its free cash flows will fall in 2014 due to the increase in capex. However, free cash flows are expected to increase 6.7% in 2015.

The company’s stock has a dividend yield of 2.73%, with a three-year and five-year dividend growth rate of 20.95% and 16% respectively. Historically, the allocation of its operating cash flows shows that Microsoft has paid an increasing portion of its cash flows from operations in dividends. Although its dividend coverage has fallen from a high of 5.3x to 3.9x, the company is still in a position to pay healthy dividends with a payout ratio of 35%.

Microsoft recently announced a 22% increase in its quarterly dividends, and a buyback program worth $40 billion with no expiration date. As of March 2013, Microsoft’s stock had a total shareholder’s yield* of 4.6%; with additional buybacks scheduled for the future, it will be able sustain this level. The graph below shows expected dividends per share till 2016.

Apple

Apple earns more than 50% of its revenues from its iPhone devices alone. Apple recently launched two variants of its iPhone, including the premium-priced iPhone 5s and the budget iPhone 5c. Beating market estimates, Apple sold a record nine million units of the two new devices over the weekend following the launch. It is reported that the split in unit sales was 50-50 between both variants.

The iPhone 5c will drive growth and revenues for Apple in the future, and the company itself has raised its earnings guidance to the high end of its previous range of $34-37 billion. A distribution deal with China Mobile has not yet been finalized, but sales are expected to be boosted significantly once an agreement is reached.

Apple’s revenues and EPS grew by 45% and 62% on average over the last five years. Analysts expect EPS growth of 8.4% for the next three years, which is a lot lower compared to its historical growth rate, but sustainable in the maturing smartphone industry.

Apple paid its first dividend in 2012. The company’s stock currently has a dividend yield of 2.36%, with a one-year dividend growth rate of 330%.

Additionally, Apple is currently involved in an aggressive share buyback program. As of June 2013, Apple has bought back shares worth $18 billion as part of an accelerated $60 billion share repurchase program. Carl Icahn, an activist investor, has been pushing Apple to expand the program to $150 billion, or one-third of its market capitalization. If Apple agrees, the total returns to shareholders will be immense. As of the last quarter, Apple held $146 billion in cash reserves.

Due to Apple’s aggressive share buyback policy, the stock’s dividend yield alone may not be a true representation of its potential returns on investment. Apple’s shareholder yield is a better indicator as it has been 6.6% for the last 12 months.

*Shareholder yield is net buyback, plus the dividends that the company has been paying out to shareholders

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