IBM (NYSE:IBM) has disappointed plenty of investors, including Warren Buffett, with 20 straight quarters of annual revenue declines and a 20% haircut in its market value over the past five years. But as I discussed in previous articles, Big Blue's low valuation and high dividend should limit the stock's downside potential.
IBM pays a forward yield of 3.9%, which is almost double the S&P 500's average yield of 2%. That dividend is supported by a low payout ratio of 46%, which gives it plenty of room to continue its 22 straight years of annual dividend hikes.
IBM's stock trades at 13 times earnings, which is below the average P/E of 19 for the IT services industry. But IBM's growth is also anemic, with analysts expecting a 2% sales decline and 1% earnings growth this year. Let's examine three other tech and telecom stocks that offer better dividends than IBM and provide better growth prospects for long-term investors.
Qualcomm (NASDAQ:QCOM), the biggest mobile chipmaker in the world, pays a slightly higher forward yield of 4%. That dividend is supported by a payout ratio of 71%, and Qualcomm has raised its dividend annually for 13 straight years.
Qualcomm initially seems to have worse growth prospects than IBM, with analysts expecting its revenue and earnings to respectively fall 3% and 4% this year. Those declines are attributed to its loss of market share in mobile chipsets to cheaper rivals like MediaTek and first-party chips from bigger smartphone makers, and an OEM revolt against its high-margin wireless licensing fees.
It's also dealing with a series of antitrust probes and lawsuits -- which claim that it leveraged its wireless patent portfolio to push competitors out of the market and secure exclusive deals.
But looking ahead, Qualcomm is also expected to close its $47 billion acquisition of NXP Semiconductors in the near future, which would diversify its business away from the troubled mobile market, grow its addressable markets by 40% by 2020, and make it the biggest automotive chipmaker in the world. The deal is also expected to be "significantly accretive" to its non-GAAP earnings once it closes. I believe that's a better turnaround strategy than waiting around for IBM's "strategic imperatives" growth to finally pay off.
Investors who think Qualcomm looks too risky should consider buying telecom giant AT&T (NYSE:T), which pays a forward yield of 5.1% and has hiked its dividend annually for over three decades -- making it a "dividend aristocrat," a company that has hiked its payout for over 25 straight years. That dividend is supported by a payout ratio of 95%.
AT&T is the second-largest wireless carrier in the U.S. after Verizon, and it's also the biggest pay TV provider in the country, thanks to its acquisition of DirecTV in 2015. It will also become one of the biggest media companies in the world after its proposed acquisition of Time Warner clears regulatory hurdles.
Those industry-leading positions create a very wide moat for AT&T, and the company can bundle together its landline, wireless, and pay TV businesses into streaming bundles in a wide variety of ways -- which could be bad news for Netflix.
Analysts expect AT&T's revenue to fall 2% this year, and for its earnings to rise 2%. However, those estimates don't include the Time Warner deal, which could become accretive to AT&T's earnings and free cash flow within the first year, and generate $1 billion in annual run rate cost synergies within the first three years.
Qualcomm and AT&T are also cheap
In addition to offering higher yields and more exciting long-term growth prospects than IBM, Qualcomm and AT&T are also fundamentally cheap.
Qualcomm trades at 19 times earnings, which is lower than the industry average of 25 for semiconductor companies. AT&T trades at 19 times earnings, versus the industry average of 22 for telecom companies.
So before you buy IBM for its dividend, take a closer look at Qualcomm and AT&T to see if they better suit your income investing needs. I personally own both stocks as long-term income plays, and I'm not losing any sleep over either one.