Most investors believe that tech companies only start paying big dividends after they run out of room to grow. While that might be true, "old tech" stocks are still great income generators, and their low valuations provide downside protection and upside potential.
To find cheap "old tech" stocks with solid yields, I generally look for P/E ratios that are lower than industry averages, a 5-year PEG ratio close to 1, a dividend yield of at least 3%, and a sustainable payout ratio. Let's examine three stocks that meet all four criteria -- Cisco (NASDAQ:CSCO), Intel (NASDAQ:INTC), and Qualcomm (NASDAQ:QCOM).
Networking giant Cisco currently trades at 14 times earnings, compared to the industry average of 20 for the networking and communication devices industry. Analysts currently expect Cisco to grow its annual earnings by about 10% over the next five years, which gives it a fairly low 5-year PEG ratio of 1.2 (a PEG ratio under 1 is considered "undervalued"). Over the past 12 months, Cisco has paid out 36% of its free cash flow (FCF) as dividends. It currently pays a forward yield of 3.6%, and has hiked its dividend annually for the past five years.
Cisco's core businesses of switches and routers are slow-growth ones, but the company has been aggressively expanding its higher-growth businesses like security solutions and service provider video -- which both posted double-digit annual sales growth last quarter and offset the company's single-digit declines in switches and routers. Cisco also divested poorly performing units, like set-top boxes, and invested in higher growth markets like the Internet of Things and cybersecurity through big acquisitions. Since Cisco can bundle these new services with its networking hardware, it will likely grow its market share and sales more effectively than smaller competitors.
Shares of Intel have fallen nearly 10% in 2016 due to concerns about sluggish PC sales, weaker-than-expected data center growth, and the company's failed push into smartphones. The company has aggressively invested in the Internet of Things (IoT) and wearables to offset those losses, but those businesses still only account for a tiny percentage of Intel's overall sales and earnings.
However, Intel's decline has reduced its P/E ratio to just 14, which is less than half the industry average of 33 for the broad line semiconductor industry. Despite its current weakness, analysts expect Intel's annual earnings to grow 10% annually over the next five years (due to a cyclical rebound in PC sales), which gives it a 5-year PEG ratio of 1.3. The chipmaker has paid out 39% of its FCF as dividends over the past 12 months, and has raised its payout annually for the past two years. It currently pays a forward yield of 3.3%.
Qualcomm, the chipmaker that crushed Intel's mobile efforts, currently faces big problems of its own. Its chipmaking business, which generates most of its revenue, has been losing market share in mobile chips to cheaper rivals like MediaTek and first-party chips from OEMs like Apple and Samsung. Its patent licensing business, which generates most of its pre-tax profits, has been targeted by companies and government regulators, claiming that Qualcomm's 3% to 5% cut of the wholesale price of every smartphone sold worldwide is too high.
But like Intel, Qualcomm hopes that expanding into new markets like IoT devices, drones, action cameras, cars, and data centers will offset those losses. It's too early to say if those strategies will work, but Qualcomm's 20% decline over the past 12 months has made the stock fundamentally cheap. The chipmaker trades at just 17 times earnings, which is lower than the industry average of 25 for the communication equipment industry. Analysts believe that its annual earnings will improve 11% over the next five years, which gives it a 5-year PEG ratio of just 1.2.
Qualcomm pays a forward yield of 3.9% and has paid out 45% of its FCF as dividends over the past 12 months. The company has raised its dividend annually for the past 13 years, which makes it a much more reliable dividend growth stock than Cisco or Intel.
Should you buy these stocks today?
Cisco, Intel, and Qualcomm aren't great stocks for growth investors. But their low valuations and decent dividends make them ideal choices for conservative income investors. Moreover, adding a few "old tech" names to your long-term portfolio can offset some of the volatility that sexier "new tech" names might cause.
Leo Sun owns shares of Qualcomm. The Motley Fool owns shares of and recommends Apple and Qualcomm. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends Cisco Systems and Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.