The escalating trade war is causing many investors to abandon higher-growth tech stocks and flock toward more conservative dividend stocks in defensive sectors like consumer staples and utilities. However, there are plenty of solid tech stocks that still offer a decent balance of growth and income.
A tech heavyweight trading at a discount valuation
Leo Sun (Cisco): Networking hardware giant Cisco currently pays a forward yield of about 3%. It has hiked that dividend every year since introducing it in 2011, and it plans to return “at least” 50% of its free cash flow to shareholders via buybacks and dividends.
Cisco trades at just 13 times forward earnings — a low valuation compared to its 20% adjusted EPS growth in fiscal 2019 (which ended on July 27). However, that's mainly because Cisco's stock recently stumbled after it posted softer guidance for the first quarter of 2020.
Cisco expects its revenue to rise just 0% to 2% and for its adjusted EPS to grow 7% to 9% — compared to expectations for 2% revenue growth and 11% earnings growth. It mainly attributed that deceleration to softer enterprise demand in certain markets, including the U.S., U.K., and China.
Cisco only generates a low single-digit percentage of its sales from China, but sales in the region plunged 25% during the quarter as it was barred from bidding on new projects at China's state-backed enterprises. That's a significant setback for a company that usually generates single-digit revenue growth.
However, Cisco's margin forecasts looked stable, and its stickier higher-margin software subscription revenue now accounts for 70% of its total software sales. Its planned acquisition of optical equipment maker Acacia Communications could also help it cut costs and sell upgraded devices to more hyperscale customers.
Cisco ended the quarter with $33.4 billion in cash, cash equivalents, and short-term investments, which gives it plenty of room for fresh buybacks, dividends, and acquisitions. Therefore, investors who stick with Cisco should expect tighter valuations and higher yields over the long term.
Take a closer look at this display technology giant
Demitri Kalogeropoulos (Corning): Investors weren't thrilled with Corning's most recent earnings report. And their negative reaction, plus general market volatility, has helped push shares lower in recent weeks while lifting the glass display giant's dividend yield back up near 3%.
Its second-quarter operating trends were solid. Sure, the core optical communication division is slowing down as data center and optical fiber network investments weaken in some parts of the world. “We're not immune to economic downturns or trade disputes,” CEO Wendell Weeks told investors in late July.
Yet Corning still managed healthy growth across its broader portfolio and is predicting gains in every division this year. Hitting those targets would translate into market share gains, especially in an optical communication industry that's shrinking modestly.
Meanwhile, rising profitability is giving Weeks and his team more ammunition they can direct toward their ambitious goal of investing around $11 billion into the business over the next three fiscal years. These types of spending programs have made the company more resilient lately so that returns continue marching higher even if certain market niches struggle. There's every reason to expect further improvements on that score over the next few years.
Grab this tech leader before it rebounds
Steve Symington (Broadcom): Shares of Broadcom have fallen slightly since I suggested in late June that the semiconductor leader was trading at a rock-bottom price. But that's also not terribly surprising considering little has technically changed since the company warned that macroeconomic headwinds and escalating trade tensions between China and the U.S. had dampened hopes for its growth to recover in the second half of 2019. For fresh color to that end, we'll likely need to wait until Broadcom releases third-quarter results in mid-September, or at least unless the company provides a preliminary update between now and then.
Earlier this month, though, Broadcom gave investors another reason to cheer by agreeing to acquire Symantec‘s enterprise security business for roughly $10.7 billion in cash. The move was surprising considering the two companies had only just ceased talks over a potential outright merger a few weeks earlier, particularly after Broadcom reportedly lowered the price it was willing to pay for all of Symantec after performing additional due diligence.
Now I think Broadcom is in a better position, acquiring the part of Symantec in which it was the most interested anyway. To be sure, in the press release announcing the final deal, Broadcom boasts that the move accelerates its effort to build “one of the world's leading infrastructure technology companies,” and it will add over $2 billion of “sustainable, incremental run-rate revenues” and $1.3 billion of pro forma EBITDA after accounting for expected synergies.
Coupled with Broadcom's high dividend yielding around 3.8% annually at today's prices, I think the stock is as attractive as ever for long-term investors willing to buy now.