The coronavirus pandemic has given the stock market a big blow in 2020, with major indexes such as the S&P 500 losing substantial value. The pullback has made stocks cheaper than before, opening an opportunity for savvy investors to buy some top dividend-paying names at enticing levels.
Apple (NASDAQ:AAPL) and Cisco Systems (NASDAQ:CSCO) are two such stocks that are trading at attractive valuation levels after the recent sell-off. Both tech giants offer decent dividends -- giving investors an income stream to fall back on in difficult times -- and could stage a nice recovery once the COVID-19 outbreak is contained.
1. Apple's near-term woes make it an attractive bet
The recent stock market rally has helped Apple stock recover some of its losses from late February and early March, but its valuation continues to remain attractive. Apple stock's price-to-earnings (P/E) ratio of 21 is higher than its five-year average multiple of 16 as of this writing, but there is a chance that it may become cheaper in the coming days.
That's because Apple's first-quarter 2020 financial results are expected to take a substantial hit on account of the coronavirus. Store closures in China and across the world are going to weigh on iPhone sales, while the economic effect of the outbreak is another issue that the smartphone giant will have to contend with.
For instance, iPhone sales in the U.S. fell 56% annually in the month of March as per research from KeyBanc Capital Markets. The company had faced a similar predicament in China in February when iPhone sales had plunged 61% over the prior year. So, Apple's shares may fall further when the company releases its results later this month, giving investors a better entry point into a potentially lucrative dividend stock.
Apple carries a dividend yield of 1.15% and sports a dividend payout ratio of 24.2%. The company has raised its dividend for seven years. The last increase came in April 2019 when the payout was hiked by 5%. The good part is that Apple's dividend appears to be safe despite a potential weakness in the near-term financial performance, thanks to a conservative payout ratio.
The company paid out $14.1 billion in dividends last fiscal year, which is easily covered by the company's free cash flow.
Apple's free cash flow may head south in the near term as iPhone sales plunge, though the company's services business may help it mitigate the weakness to some extent. The contribution of Apple's services business has increased to 18% of total revenue. It carries a gross margin of 64% as compared to the 34% gross margin of the hardware business.
More importantly, demand for its services is likely to improve during the COVID-19 pandemic -- Apple's App Store in China saw a 62% surge in mobile game downloads in February. The higher margins of the services business and a potential increase in demand could help Apple keep its free cash flow performance stable even in these difficult times.
Another thing to like about Apple is that it could emerge stronger from the coronavirus crisis. It is reportedly looking to diversify its supply chain beyond China. Supply chain rumors also suggest that Apple is in the process of launching a budget device, which could help boost sales given the potential economic effects of the virus.
2. Cisco is a bargain right now
Cisco has a fat forward dividend yield of 3.5% and has a payout ratio of 46.4%. Investors can buy their way into this lucrative dividend stock at an attractive valuation right now as it trades at a trailing P/E ratio of 16. This is lower than Cisco's average P/E ratio of 19 last year and well below the company's five-year average P/E ratio of nearly 155.
Cisco currently has 4.24 billion shares outstanding and has a forward annual dividend rate of $1.44, which means that the company's annual dividend outlay will be around $6.1 billion. Cisco should be able to cover its dividend payment thanks to strong free cash flow generation over the past year.
What's more, Cisco's cash position of $27 billion easily exceeds its debt of $17 billion. So, the networking giant should be able to tide over any near-term headwinds arising out of the coronavirus pandemic.
Another thing to like about Cisco is the potential boost that its applications business might get. This business supplies just over 11% of the company's overall revenue, and it might get a shot in the arm as people work from home thanks to social distancing measures and lockdowns across the globe.
Cisco Webex -- the company's videoconferencing platform -- has seen a big surge in users in the wake of the COVID-19 outbreak that led it to boost capacity to support the platform. Cisco CEO Chuck Robbins points out that Webex has been handling four to five times the capacity it was meant to handle. He also adds that Webex had 300 million people using the platform each month. That number could surge substantially given the increase in volumes that Cisco is handling right now.
Additionally, investors shouldn't forget that Cisco gets just over 54% of its revenue by supplying networking infrastructure. That business is sitting on lucrative opportunities such as 5G, where infrastructure spending is expected to ramp up significantly in the coming years. Gartner anticipates that spending on 5G infrastructure could jump from $2.2 billion last year to $6.8 billion in 2021.
Cisco is one of the leaders in the race to roll out 5G, as more than 40 service providers across the globe have reportedly been using its 5G solutions.
So, value investors looking for a dividend stock should definitely keep an eye on Cisco. It can weather the coronavirus-induced downturn thanks to its strong balance sheet and free cash flow, and it may stage a quick recovery when things get back to normal and the 5G roll-out gains momentum.