Do you know that itch to buy some stocks? Well, I am feeling it now… It’s been quite a while since I purchased anything new due to various expenses and I think I am going to pull the trigger soon.
Since I am an IT engineer I figured that it would make sense to have some exposure to tech sector. I am trying to figure out which tech stock to choose at the moment to be added to my portfolio.
I am interested in the following characteristics when choosing my stocks:
- Dividend yield
- Payout ratio
- P/E ratio
- Dividend increase rate
- Years increasing dividends
- Debt level (Quick ratio and Total debt to equity)
I came upon a post from DivHut who is trying to decide which tech stocks to invest to. I thought his list of possible stocks would be a good starting point for my own analysis. Based on criteria I am interested in, I evaluated each of the company:
One of the most important things for me as dividend investor is the annual yield of dividends. I would like it to be at least 2.5%. As we can see from the above table, only 4 companies from the selected list suit this criteria (CSCO, QCOM, INTC & IBM). I also prefer if company’s payout ratio does not exceed 60%. If it’s higher than that, there is bigger risk that company will not grow its dividend or even cut it in the near future. This reduces the list by one more company – QCOM’s payout ratio is whopping 83% which looks too much to me. This leaves me with 3 companies to consider – CSCO, INTC & IBM.
Price/Equity ratio looks best for IBM. INTC (with P/E of 13.29) and CSCO (P/E 16.19) have higher P/E ratio but are also undervalued at the moment in my opinion as their P/E is lower than industry’s.
Recent dividend growth rate is bigger for Cisco and I would expect it to raise substantially for at least the next few years. What I like about IBM is the fact that it’s raising dividends for more than 20 years in a row and the payout ratio is not that high. INTC is lagging behind with the lowest growth rate of these 3 companies. At this point I would cross this company out and stay with considering CSCO and IBM.
Cisco’s financial stability is looking much better than IBM’s. Quick ratio is a measure of how well a company can meet its short-term financial liabilities. It can be calculated as follows: (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities. The bigger the ratio, the better situation of the company is to pay their short-term debts. CSCO (current ratio 2.98) looks much better than IBM (current ratio 1.21). Total Debt to Equity ratio is the worst for IBM – this is another signal that the financial situation of this company is looking worse than the one of competitors. Cisco is looking financially healthier.
Prices of both IBM and CSCO recently fell mainly due to falling revenues. I believe that the reaction of markets was too big and they can still turn around. Also, their dividend is still safe due to low payout ratio. Price fall is a good opportunity to enter the market. From my previous experience it works out in most of the cases. Even if the price stays at these levels, dividend yield should still earn something.
Looking at the above table, overall stats are looking best for IBM with CSCO trailing behind a little bit. However, I would still prefer CSCO due to my personal experience and exposure to IT in my workplace. The bank I am working in is using Cisco’s software – VPN client AnyConnect (for remote working), Webex (for conferences). It was used in my previous company as well. IBM software is also used but usually it’s used by smaller field of people and is not that critical. Even bigger factor is the network solutions Cisco provide – I can often see Cisco boxes arriving to our office. When you speak about network, you often speak about Cisco. What I like about Cisco is that they have moat in their industry – Computer Communications Equipment. Most of other companies I was able to find in this specific field are at least 10 times smaller than Cisco. Of course, small size may be an advantage in the long run but it’s hard to predict which of them will be successful. Also, they will not be paying dividends before they reach some sort of maturity in their business. After discussion with my colleagues at work, we also came to a conclusion that Cisco is not going anywhere – there are too many companies depending on their network solutions. On the other hand, IBM has more risks as they are operating in more fields than Cisco. E.g. Amazon Web Services are putting a lot of pressure on server-focused companies like IBM. Recent selling off of IBM stocks by Warren Buffett also shows signs that the company is not doing that well.
So I will put some more thought into Cisco, consider potential risks and decide if it is worth investing to.
Do you have any tech companies in your portfolios? Would you choose another one from the list or stay away from tech sector altogether?
Thanks for reading!