Many companies reduced or suspended their dividends as they faced intense challenges during the COVID-19 pandemic. Yet many companies in the tech sector, which was better-insulated from the outbreak than other industries, sustained their payouts without issue.
Last month, I highlighted three dividend-paying tech stocks that were still worth buying: TSMC, IBM, and Broadcom. Today, I'll add three more companies to that list.
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1. Texas Instruments
Texas Instruments (TXN +1.54%) sells analog and embedded chips to a wide range of industries. Over the past few years, it cut its production costs up to 40% by shifting from 200mm to 300mm wafers, which significantly boosted its gross margin and free cash flow.
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TI aims to return all of its FCF to investors via buybacks and dividends. The company has reduced its share count by over 45% since 2004 and raised its dividend annually for 16 straight years. It pays a forward dividend yield of 2.5% as of this writing, spending about 56% of its free cash flow on those payments over the past 12 months.
Revenue fell 9% in 2019 due to uneven chip sales to the macro-sensitive auto, industrial, communications infrastructure, and personal electronics sectors, and its earnings dropped 6%. Analysts expect revenue and earnings to decline another 7% and 3%, respectively, this year, as it grapples with the shutdowns of auto plants throughout the COVID-19 crisis.
That outlook seems grim, but Texas Instruments has weathered plenty of downturns in the past. Its year-to-date rally of about 13% also suggests investors are already looking past these near-term headwinds and focusing on its shareholder returns. Its stock may not seem cheap at nearly 30 times forward earnings, but its P/E ratio should cool off as its earnings stabilize, and the company continues to repurchase shares.
2. Cisco Systems
Cisco (CSCO 3.08%) is the world's largest manufacturer of networking switches and routers. It also bundles various software services, including security and collaboration platforms, with its hardware products.
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Revenue fell 5% in fiscal 2020, which ended in late July, as macro headwinds throttled sales of its hardware products to enterprise and data center customers. However, buybacks lifted its adjusted earnings 4% for the year.
The company's troubles will likely persist through fiscal 2021 due to COVID-19, a trade war, and other macro headwinds, and analysts expect its revenue and earnings to decline 2% and 4%, respectively, during the year. Those growth rates are anemic, but Cisco's low forward P/E ratio of 15 indicates that plenty of pessimism is already baked into the stock.
On the bright side, Cisco's security and Webex collaboration businesses are still growing, it's generating a higher mix of its revenue from software and services, and its gross margin remains stable. It also pays a generous forward dividend of 3.4%, and it has raised that payout annually for nearly a decade. It spent just 41% of its FCF on that dividend over the past 12 months, which leaves it with plenty of room for future hikes.
3. Seagate Technology
Seagate (STX +0.00%) is one of the world's largest manufacturers of platter-based HDDs (hard disk drives). Unlike its top rival Western Digital, which expanded into the higher-growth SSD (solid state drive) market, Seagate focused on developing cheaper and higher-capacity HDDs for enterprise and data center customers.
The company was riding a cyclical rebound in the data storage market before the COVID-19 crisis derailed that recovery. Specifically, declining HDD sales to the video and image application, mission-critical, and consumer markets offset its robust sales to the cloud and data center markets.
Seagate's revenue was up just 1% in fiscal 2020, which ended in early July, while adjusted EPS fell 4%. Like the other companies on this list, Wall Street expects that pain to continue this year, reducing its revenue and earnings 5% and 8%, respectively.
But like Texas Instruments and Cisco, Seagate has weathered plenty of downturns before, and its cyclical recovery should resume after the pandemic passes. Until then, investors can collect a dividend that yields 5.4% as of this writing, and its low forward P/E ratio of 10 should set a firm floor under the stock. Seagate raised its dividend for the first time in four years last November. It spent just 60% of its FCF on that payout over the past 12 months, so it could reward patient investors with another dividend hike later this year.
