Technology
5 Large Cap Tech Giants On Sale and It Is Time to Buy
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The biggest loser coming out of the election was the technology sector, and we have written at length about the worries over trade and some of the vitriol hurled at President-elect Trump from Silicon Valley. While stocks have rallied, the sell-off put many of the top dividend-paying stocks right back in the wheelhouse for investors looking for solid total return.
We screened the Merrill Lynch research universe for large cap technology stocks that were rated Buy and pay a dividend. We found five that make good sense for investors looking to put some cash to work now.
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 third quarter, but data center sales came in way below expectations for the tech giant. Intel does a stunning 82.4% of their sales overseas, the lion’s share of it in Asia, where the chips that it produces are used in personal computers, tablets and other personal electronic devices. Fears of trade issues with China have taken a toll on the stock, and the timing looks good.
Intel investors receive a 3.0% dividend. The Merrill Lynch price target for the stock is $42. The Wall Street consensus target is $40.26. The shares closed Thursday at $35.02.
Microsoft
This is another top old-school technology stock that gives investors a degree of mega-cap tech safety, and it has a massive $105 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. 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 2.57% dividend, and the forward valuation remains compelling. The Merrill Lynch price target is $68. The consensus target is $63.79. The stock closed Thursday at $60.64.
Oracle
This top software stock has traded sideways since the spring and looks to be putting in a nice cup and handle formation. Oracle Corp. (NYSE: ORCL) develops, manufactures, markets, sells, hosts and supports database and middleware software, application software, cloud infrastructure, hardware systems and related services worldwide.
The company licenses its Oracle Database software to customers, which is designed to enable reliable and secure storage, retrieval and manipulation of various forms of data. Its Oracle Fusion Middleware software aims to build, deploy, secure, access and integrate business applications, as well as automate their business processes.
Trading at 15 times estimated 2016 earnings, and sporting a solid free cash flow yield, many analysts also feel that as the company’s 12C database cycle starts to contribute during calendar 2016, the stock could very well be poised for what they term a breakout year. After recent investors meetings, some analysts raised fiscal year 2017 cloud margins to 66% from 63% and earnings per share to $2.80. Merrill Lynch and others on Wall Street feel that the software giant may be on the verge of a multiyear database product cycle.
Investors receive a 1.5% dividend. The $48 Merrill Lynch price target compares with the consensus target of $44.58 and Thursday’s close at $40.25.
Texas Instruments
This old-school chip tech company was out of favor but has come back solid. 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.
Texas Instruments posted strong third-quarter numbers and also increased its quarterly dividend by 32% to $0.50 per share, or $2.00 annualized. The increase reflects the company’s continued strength in free cash flow generation and its commitment to return excess cash to shareholders.
Top analysts cite the potential for reduced corporate taxes, infrastructure spending and also increased defense spending as positive for the chip giant going forward.
Investors receive a 2.77% dividend with the new increase. Merrill Lynch set its price target at $82, while the consensus price objective is $74.34. The shares closed Thursday just below that, at $72.08.
Qualcomm
This top technology stock has done very well this year. Qualcomm Inc. (NASDAQ: QCOM) is a world leader in 3G, 4G and next-generation wireless technologies. The company includes the licensing business, QTL, and the vast majority of its patent portfolio. Its subsidiary Qualcomm Technologies operates substantially all of Qualcomm’s engineering, research and development functions, as well as substantially all of its products and services businesses, including its semiconductor business, QCT.
Qualcomm reported third-quarter revenue and earnings that beat Wall Street estimates. Fourth-quarter guidance was also better than expected. In China, new semiconductor products are gaining share and management is making better progress with royalty collections.
The analysts are bullish on the company’s acquisition of NXP Semiconductors, which Qualcomm is buying in an all-cash deal at $110 per share. The deal is expected to close at the end of 2017 and should be immediately accretive to earnings. The merger brings together complementary products for mobile, automotive, Internet of Things and networking applications.
Investors receive a 3.22% dividend. Merrill Lynch has a $76 price objective, while the consensus target is $73.10. The shares closed at $66.67.
These five Buy-rated Merrill Lynch favorites all pay excellent dividends, which they tend to raise on a regular basis. While not as suitable for ultra-conservative accounts, they all fit well in most growth and income portfolios.
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