In the past year, technology stocks have performed admirably: The sector is up 41%. Given that, finding a high-yield dividend stock in tech at a relative bargain price can be extra challenging.
However, two of the biggest names in technology still offer both value and income: infrastructure-as-a-service (IaaS) and cloud software provider Cisco (NASDAQ:CSCO), and its fellow rapidly evolving tech stalwart, Intel (NASDAQ:INTC). Both are undergoing business transformations, and both trade at valuations well below their peers.
There's no substitute for time
Long known for its dominance of the enterprise networking space, Cisco is moving away from its over-reliance on switches and routers. For long-term investors, the upside to this transition is that impatient traders have pushed its share price down to just 18 times trailing earnings, nearly half its peer group average of 34 times. And its forward price-earnings ratio is a meager 14. At these levels, Cisco's dividend is also yielding 3.3%, well above the 2.3% average yield among its dividend-paying peers.
When it released its fiscal 2018 first-quarter statement Wednesday afternoon, Cisco said its total revenue slid 2% to $12.14 billion, similar to its decline in the last few quarters. But what income-seeking value investors should zero in on was its rise in recurring revenue, which now equals 32% of total sales, up three percentage points. Cisco now boasts a $3.87 billion foundation of revenue investors can rely on to continue.
Based on guidance for the current quarter of a 1% to 3% rise in revenue, Cisco's transformation is rounding the corner and heading for home, and investors are taking notice. Cisco stock opened trading Thursday up 7% due to its slight per-share earnings "beat" of $0.61 -- analysts were expecting $0.60 -- and its strong guidance.
And with its $1.9 billion acquisition of BroadSoft (NASDAQ: BSFT) pending -- a deal pooh-poohed by some -- Cisco will expand its cloud software suite, particularly its collaboration offerings. Bringing BroadSoft into the fold demonstrates Cisco is laser-focused on the future, and that future is looking rosier with each passing quarter.
Another key objective of CEO Chuck Robbins and his team is shaving overhead in conjunction with its business shift. Cisco hit a home run here too, paring 7% off operating expenses. Building a base of recurring revenue and becoming more efficient have been ongoing themes for Cisco, and there's no reason to think the improvements in these all-important areas will slow anytime soon.
A trifecta awaits
Data centers, artificial intelligence (AI), the Internet of Things (IoT), and memory solutions are now the primary drivers of Intel's growth. But as with Cisco, Wall Streets impatience drove Intel's stock price to bargain basement levels.
But then Intel reported a stellar third quarter in which it raked in record operating income of $5.1 billion and earnings per share (EPS) of $0.94, up 36% compared to last year. Intel stock is up 11% since the company shared that good news. So, is it too late for income and value investors to profit? Not at all.
Even after the post-earnings share price pop, Intel trades at just 16 times earnings compared to an average of 26.3 times earnings for its peers. The year ahead looks even more attractive considering Intel is valued at 14.2 times forward earnings. And its dividend, currently yielding 2.4%, is also higher than its peers' 1.9% average.
The record-setting stats weren't the only upsides to Q3. Though PC chip sales of $8.9 billion were flat, Intel more than made up for it in other areas. Its $4.9 billion in data center revenue was a 7% year-over-year increase, and its sales of programmable solutions -- a key component of Intel's IoT efforts -- rose 10% to $469 million.
Two other groups also really hit their stride last quarter. Memory sales soared 37% to $891 million, closely followed by a 23% improvement in IoT revenue to $849 million. An impressive $7.1 billion of Intel's $16.1 billion in revenue, equal to 44%, is now derived from its core units. Toss in a 10.5% drop in operating expenses, record EPS, growth where it counts, along with tremendous value, and Intel is a value investor's dream stock.