The tech industry may not be top of mind for investors looking for income, but it probably should be. A growing business is also able to grow its dividend payout, and a rising dividend is a powerful force over time. To that end, three Fool.com contributors think Texas Instruments (TXN -0.90%), Cisco Systems (CSCO -0.42%), and Lumen Technologies (LUMN -0.09%) are worth a look. Here's why.
A master at balancing technology development with shareholder returns
Nicholas Rossolillo (Texas Instruments): This semiconductor leader has been an incredible dividend stock for a long time now. In fact, if you're a fan of companies that return excess cash to its shareholders, Texas Instruments should be a high priority for you to research.
Prominently displayed on its investor relations home page is a statement by CEO Rich Templeton: "The best measure to judge a company's performance over time is growth of free cash flow per share, and we believe that's what drives long-term value for our owners." Free cash flow is what's left over after cash operating expenses (including research and development) and capital expenditures (like property and equipment) are paid for. TI has excelled at generating growth in this metric. It's averaged 11%-a-year growth in this department since 2004, and has been dedicated to returning all of it to shareholders via dividends and share repurchases. In fact, it's raised its dividend every year since 2004.
The record will remain unbroken even though 2020 was a less-than-stellar year for TI. The chipmaker raised its quarterly payout from $0.90 to $1.02 per share last autumn, currently making the stock good for an annual yield of 2.5%. A decade ago, the quarterly payout was just $0.13 a share. Talk about a pay raise.
What's great about TI is that the semiconductor industry requires constant development of new tech and improvement of the manufacturing process. TI has kept pace with the times and is still a top name in computing -- especially in the auto industry and in other industrial applications. The company is due for a rebound as its customers recover from effects of the pandemic, which makes me think the current price to trailing-12-month free cash flow ratio of 28 is a decent value for Texas Instruments. If a 2021 manufacturing rebound paired with long-term growth and rising dividend income is what you're after, this top chip company is a rock solid bet to grow your wealth over time.
Cisco's young dividend history is off to a running start
Anders Bylund (Cisco Systems): Networking equipment veteran Cisco Systems paid its first dividend in the spring of 2011, starting with a quarterly payout of just $0.06 per share. Ten years later, the company has increased its dividend payouts every year without fail and the quarterly checks now weigh in at $0.36 per share. That works out to an annual yield of 3.2% at Cisco's current prices, and we will probably see another boost before the next payout shows up in March.
There is real muscle behind Cisco's consistent dividend growth. The company financed its payouts over the last four quarters with just 40% of its $15.2 billion in free cash flow. Another $2.6 billion was returned to shareholders in the form of share buybacks. That's a very shareholder-friendly way to manage the company's surplus cash flow, which is showing predictable growth in the long run.
The company is currently knee-deep in a strategy shift that separates Cisco's software and hardware offerings on a fundamental level. In the updated business model, Cisco's switches and routers are managed and even upgraded through cloud-based subscription services. Thanks to this flexible handling of a shifting network equipment market, you should expect Cisco to remain a leader in this thriving space for decades to come.
Cisco's stock has largely traded sideways over the last year, displaying softer swings both up and down relative to the broader market. Today, you can pick up Cisco shares at a very reasonable valuation of 21 times free cash flow or 13.6 times forward earnings. Locking in those juicy dividends right now will give you an even better effective yield on your original investment when the next payout boost comes -- and the next, and the next, and the next.
One of last week's pumped-up deep-value stocks is still a buy
Billy Duberstein (Lumen Technologies): A lot of very problematic stocks skyrocketed last week, and not based on much that was "fundamental." In fact, most of last week's soaring stocks had significant business problems, which is why their short interest was so high, and therefore why they were targeted by Reddit investors. However, one of the beaten-down value stocks that had a big intra-week spike, Lumen Technologies, still looks cheap based on business fundamentals.
Lumen was up as much as 50% last week before correcting and finishing up around 9% as of Thursday night. Still, its valuation remains undemanding, with a dividend yield around 8.5% and a stock price still below pre-pandemic levels.
In the third quarter, Lumen reported $806 million in adjusted free cash flow, after backing out some one-time integration expenses resulting from its late 2018 merger with Level 3 Communications. That annualizes to about $3.2 billion, even in a tough year for small business customers amid the pandemic. Yet even after Lumen's recent run, its market cap is still only around $13 billion, just 4.1 times its annualized free cash flow.
Yes, Lumen has a mountain of debt -- about $32 billion, in fact. However, the company only pays about $1.1 billion out in dividends, with the rest devoted to paying down that debt over time. Additionally, management has taken advantage of the current low-interest-rate environment and refinanced a lot of high-yield debt with lower interest notes, while also pushing maturities out toward the end of the decade.
Lumen is, of course, not without risk, as it has been experiencing mild revenue declines as older technologies wane and newer fiber-based solutions ramp up. Yet importantly, the company posted sequential adjusted EBITDA growth and margin expansion in the third quarter relative to the second quarter of 2020, when the pandemic dented results in a few segments. Additionally, management guided for continued sequential EBITDA growth in the fourth quarter on the prior conference call.
In general, Lumen's wireline telecom business should remain fairly stable, even if it's not that exciting. Yet at such a bargain-basement valuation, even mere stability could lead to an increase in the stock price. And if management can get the top line to grow again, the upside could be significant indeed.
A word of caution: Lumen is a bit risky given the revenue declines and cumbersome turnaround. However, after a week when many worse-off value stocks saw their stock prices skyrocket to questionable levels, Lumen still seems like a compelling value -- just be careful with its allocation size in your portfolio.