Technology

Merrill Lynch Has 4 Large Cap Dividend Paying Tech Stocks to Buy Now

Lee Jackson

Published: September 7, 2016 8:25 am

Last Updated: January 13, 2020 3:52 am

Summer is finally starting to turn to fall, and that means the traders and portfolio managers are back from vacation and ready to make plans for what could be a very bumpy rest of 2016. With the potential for interest rate increases, a sure to be intense final 60 days to the presidential election, and typical seasonal volatility, caution may be the best avenue for now.

For growth investors with a longer term time horizon, one well to go to is large cap technology, especially the companies that also pay solid dividends. We screened the research universe at Merrill Lynch looking for large cap technology leaders that pay dividends. We found four rated Buy that make good sense now.

HP

This is the printer and personal computer businesses of the old Hewlett-Packard. HP Inc. (NYSE: HPQ) provides products, technologies, software, solutions and services to individual consumers and small- and medium-sized businesses, as well as to the government, health and education sectors worldwide.

The company’s Personal Systems segment offers commercial personal computers (PCs), consumer PCs, workstations, thin client PCs, tablets, retail point-of-sale systems, calculators and other related accessories, software, support and services for the commercial and consumer markets.

The Printing segment provides consumer and commercial printer hardware, supplies, media, scanning device and software and services, as well as LaserJet and enterprise, inkjet and printing, graphics, and software and web services.

HP investors receive a 3.4% dividend. The Merrill Lynch price target for the stock is $15, and the Wall Street consensus estimate is $15.54. The shares closed Tuesday at $14.63.

Intel

This leader in semiconductors is working hard to scale away from dependence on personal computers. Intel Corp. (NASDAQ: INTC) designs, manufactures and sells integrated digital technology platforms worldwide. The company’s platforms are used in various computing applications comprising notebooks, two-in-one systems, desktops, servers, tablets, smartphones, wireless and wired connectivity products, wearables, retail devices and manufacturing devices, as well as for retail, transportation, industrial, buildings, home use and other market segments.

The company also provides communication and connectivity offerings, such as baseband processors, radio frequency transceivers and power management integrated circuits, and tablet, phone and Internet of Things solutions, which include multimode 4G LTE modems, Bluetooth technology and GPS receivers, software solutions and interoperability tests, as well as home gateway and set-top box components.

Intel reported an inline second quarter, but data center sales came in way below expectations. But a new partnership with Microsoft for a virtual reality, as well as a consistent shift away for reliance on chips for personal computers, keeps the stock a compelling buy.

Intel investors receive a 2.85% dividend. The $42 Merrill Lynch price target compares with the consensus target of $37.58. The shares closed Tuesday at $36.57.

Microsoft

This top old-school technology stock gives investors a degree of mega-cap tech safety and has a massive $113 billion sitting on the balance sheet. Microsoft Inc. (NASDAQ: MSFT) continues to find an increasing amount of support from portfolio managers, who have added the software giant to their holdings at an increasingly faster pace all of this year and last.

Numerous Wall Street analysts feel that Microsoft has become a clear number two in the public or hyper-scale cloud infrastructure market with Azure, which is the company’s cloud computing platform offering. Some have flagged Azure as a solid rival to Amazon’s AWS service. Analysts also 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 line 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, especially when you factor in the huge revenue potential from the banks, insurance companies and the financial services industry.

The company announced in mid-summer a gigantic all-cash $196 per share offer for LinkedIn. While some on Wall Street gasped at the huge premium paid, Microsoft continues to expand its product lines and cut its dependence on software sales. And while it remains to be seen how the fit will be, the analysts like the overall product synergies the deal brings.

Microsoft investors receive a 2.5% dividend, and the forward valuation remains compelling. Merrill Lynch has a $65 price target. The consensus target is $59.65, and the stock closed Tuesday at $57.61.

Texas Instruments

This old-school chip tech company is also a sizable auto chip player. Texas Instruments Inc. (NASDAQ: TXN) is a global semiconductor design and manufacturing company that develops analog integrated circuits and embedded processors. The company generates 80% to 90% of its revenues from its analog and embedded processing businesses, which have well-diversified end-markets (autos, industrial, personal/consumer electronics), long product life cycles and limited capital intensity. The company has 6% market share of the auto chip market.

Numerous Wall Street pros see the stock as core large cap holding, and they cite a solid high-single-digit and very diverse revenue flow, solid capital allocation to lever the balance sheet if needed, and substantial room for margin expansion as the ramp up new facilities. The company boasts sustained impressive cash flow over the past several years and has impressively returned 100% plus of that back to shareholders via stock buybacks and dividends.

Given modest capital expenditure requirements coupled with room for margin expansion, Texas Instruments should be able to sustain double-digit free cash flow growth despite slower sales growth.

Texas Instruments also posted strong second-quarter numbers that exceeded consensus estimates, and its third-quarter guidance is in line with what analysts expect.

Investors are paid a 2.18% dividend. The Merrill Lynch price target is $80. The consensus price objective is $71.57, but the shares closed just below that at $69.79.

These four top technology companies all pay a very solid and increasing dividend. The longevity of these companies is a testament to current and former executives who steered them into new product arenas to compete in the future.