Technology

4 Top Merrill Lynch Blue Chip Dividend Tech Giants to Buy for 2016

Lee Jackson

Published: December 4, 2015 9:10 am

Last Updated: January 13, 2020 4:28 pm

One of the surprises of 2016 was how poorly some dividend and dividend growth stocks did in 2015. Many on Wall Street point to the headline weight of the Federal Reserve interest rate lift-off as one catalyst for the poor performance. With a 75% probability that the Fed raises rates this month baked in, dividend-paying technology stocks make good sense for 2016.

We scanned the Merrill Lynch research universe for mega-cap technology stocks that pay dividends. We found four outstanding companies that all pay a dividends higher than the 10-year U.S. Treasury bond, and are all rated Buy at Merrill Lynch.

Intel

This top chip company has traded sideways all year, and the recent very positive earnings report certainly has helped to lift the pall hanging over the company. Intel Corp. (NASDAQ: INTC) is regarded as having among the highest shareholder cash returns at approximately 8%, but it has lagged high-growth specialty chip stocks. The iconic chip giant had a stellar 2014 on the tailwinds from continued PC and notebook sales, but this year has been a far different story. The stock has just traded back to where it began 2015.

Intel purchased chip rival Altera for a massive $16.8 billion. Some on Wall Street view the deal pessimistically, citing its high cost, aggressive growth assumptions on the part of Intel and the increase in debt. Others feel the addition will help Intel start to move away from the PC and laptop dependence. Intel’s pending acquisition of Altera would put it into the traditional fabless market of programmable logic devices, but ultimately by 2020 50% of Altera’s product line could be manufactured at Intel facilities.

Intel’s NAND flash memory business has a strong focus on enterprise opportunities. Many on Wall Street who think that the company’s new chip, which is a collaboration with Micron Technology called the 3D XPoint, could be primarily In-Memory compute in servers and its launch should coincide with Intel’s Purley platform server launch in 2016.

Intel investors receive a solid 2.82% dividend. The Merrill Lynch recently raised its price target to $40. The Thomson/First Call consensus target is $35.92. Shares closed Thursday at $34.04.

Cisco

This is one of the top mega-cap tech stock picks on Wall Street and perhaps a surprising defensive pick for volatile markets like we have witnessed. Cisco Systems Inc. (NASDAQ: CSCO) posted disappointing earnings in November, and many on Wall Street have lowered their price targets for the networking giant significantly. Cisco is also one of the 24/7 Wall St. top 10 stocks to own for the next decade.

Cisco earlier this year won an important contract for the Verizon build-out of the company’s next-generation 100G metro network. While Cisco’s optical business is small as a part of total revenue, this win is seen by Wall Street as a significant endorsement of the investments Cisco has made into its optics business.

Analysts across Wall Street point to an estimated double-digit bookings momentum for Cisco’s Meraki Cloud Services. Many think that Meraki is likely to be a $1 billion plus run-rate business this year, with an incredible 50% to 70% compounded annual growth rate. A jump from 40 GE to 100 GE data center switching and next generation security are also adding to the total sales profile and product mix.

Cisco investors receive a very solid 3.12% dividend. The Merrill Lynch price target is $30, and the consensus target is $30.36. The shares closed most recently at $26.95.
Microsoft

This top technology stock should not only do fine in the coming rising rate environment, but it gives investors a large degree of mega-cap tech safety. Microsoft Inc. (NASDAQ: MSFT) continues to find an increasing amount of support from portfolio managers, who have been adding the software giant to their holdings at an increasingly faster pace all of this year.

Numerous analysts feel that Microsoft has become a clear number two in the public or hyper-scale cloud infrastructure market with its Azure offering. Some have flagged Azure as a solid rival to Amazon’s AWS service, and some maintain that Microsoft is discounting Azure for large enterprises such that Azure may be cheaper than AWS for larger users. The top analysts believe the company continues to make steady progress with its cloud transition and expect Office 365 and Azure to be solid contributors to top and bottom lines for the next several years. While not likely to snag the top slot from Amazon, it could add huge incremental revenue for years to come.

With gaming revenues growing at a huge pace, the Xbox continues to gain ever more fans as the ultimate console to own. The company continues to upgrade the popular device, and many think that it could dominate Sony’s PlayStation down the road.

Microsoft investors receive a very solid 2.66% dividend, and the forward valuation still remains very compelling. The $56.16 consensus price target is much lower than Merrill Lynch’s $63. The stock closed Thursday at $54.20.

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Qualcomm

This top technology stock has totally underperformed this year but it is a member of the Merrill Lynch US 1 list. Qualcomm Inc. (NASDAQ: QCOM) is still a Wall Street favorite, and many are sticking to their guns, basically saying that trading at current levels, 12.6 times estimated 2016 earnings, it may be a tremendous long-term value. Qualcomm is a quality tech company with recurring royalty revenue and a strong footprint, so patient investors may fare very well.

Qualcomm is reported to be losing chip business, and activist investor Jana Partners has been pressuring the company to spin off that business for some time. Jana also wants Qualcomm to continue to cut costs, accelerate a share buyback, improve disclosures and refresh its board, which it accomplished when two new directors were added last summer. Jana is listed as one of the company’s largest shareholders, with a reported $2 billion stake.

The growth of 3G mobile technologies in emerging markets, like China and India, has positively affected Qualcomm and could be a difference maker going forward. Qualcomm is and has been for years a market leader in the development of 3G CDMA (Code Division Multiple Access) technologies. The company recently developed an LTE chipset that supports SCDMA (Synchronous Code Division Multiple Access) technology. China’s mobile network runs on this, and it could provide the company with a huge leg up in years to come. The company signed a big licensing deal recently in China that gave the stock a boost this week.

Investors receive a 3.75% dividend. Merrill Lynch has a mammoth $75 price target, and the consensus target is $64.15. Shares closed Thursday at $51.40.

The best of both worlds for aggressive growth accounts is mega-cap technology safety combined with regular and rising dividends. This makes for the perfect total return play for investors with a bigger appetite for risk.