Technology stocks are normally associated with growth, and not necessarily dividends. Yet who says you have to choose? The following three stocks look like incredible values amid this year's violent sell-off.
One pays a low dividend but is rapidly growing it, along with share repurchases at a low valuation. Another has raised its dividend not once but four times over the past year alone. And a third pays a whopping 8.6% yield, even after holding up remarkably well this year as the tech sector plunged.
Micron's investor day was illuminating
Memory and storage chipmaker Micron Technology (MU -4.61%) pays only a 0.56% yield today, but it just announced a 15% dividend increase at last week's analyst day. And the dividend is only a sweetener for Micron. The real reason to own this cheap value stock is for its share repurchases at current bargain-basement prices, along with the long-term growth of the memory industry, as well as a potential rerating higher by investors in the future.
Micron trades at only nine times trailing earnings and just 5.7 times its fiscal 2023 earnings estimates (Micron's fiscal year ends in August). That's incredibly cheap, since Micron is viewed as a cyclical commodity producer whose financial results will fluctuate with the economy.
However, Micron made a good case at its analyst day that that cyclicality should moderate. There are a number of reasons for that. First, the ability to transition to the next node of memory is slowing down, which means all of the large players are less likely to overspend and oversupply the market. Second, the memory markets are transitioning from more seasonal consumer markets, such as PCs and phones, to steadier data centers and automotive and industrial applications. Between 2021 and 2025, Micron expects auto and industrial markets to grow from 15% to 20% of revenue, and for the data center market, fueled by artificial intelligence, to grow from 30% to 42% of revenue, while mobile and PCs will fall from 55% to 38% of revenue.
Micron is also exploring a new type of customer long-term agreement, which would lock in long-term, stable pricing and margins for several years, as opposed to following volatile spot prices in the memory market. Customers may opt for this because memory is becoming a larger and larger part of the bill of materials across the industry, especially in data centers; therefore, that predictability is a win-win on both sides.
While the new model is only an experiment now, if adopted more widely, it could stabilize Micron's growth and margins. If that happens, investors may pay a much higher P/E ratio than the currently lowly valuation Micron has today. Down nearly 30% from its early year highs, Micron is an improving business with a low valuation -- ideal for today's rising-rate environment.
Microchip has been raising its dividend at a quarterly, not annual, pace
Another great semiconductor play today, although in a much different area, is Microchip Technology (MCHP -3.00%). Microchip is a highly diversified manufacturer of microcontrollers, analog chips, and field-programmable gate arrays that go into a wide variety of end-market devices, especially automotive, industrial machines, and Internet of Things applications.
Those markets are absolutely booming right now, with Microchip recently delivering record revenue, gross margin, and operating profit last quarter. Not only that, but Microchip's backlog also remained at a record as demand for its products outstripped supply.
Image source: Getty Images.
Amid the improved visibility for demand well into next year, Microchip is becoming more aggressive in its capital returns to shareholders. Having grown via acquisitions, Microchip has paid down about $5 billion of the $8 billion in debt it took on to purchase Microsemi, its most recent large acquisition, back in 2018.
Now that it has de-levered and the company is seeing booming demand, Microchip has been raising its dividend not just every year, but every quarter over the past 12 months. Over the past four quarters, Microchip raised its dividend 5.9%, 5.8%, 6.2%, and 9.1% in an accelerating fashion, and its dividend now sports a forward yield of 1.67%. Management has even been buying back stock.
Microchip trades at only 12.5 times next year's earnings estimates, despite booming growth that should last several years. It also has a lot of room to continue raising that dividend for quarters and years to come, to the benefit of shareholders.
Lumen Technologies is undergoing a big transformation and yields 8.6%
Finally, a higher-risk but higher-yielding tech stock is Lumen Technologies (LUMN -0.76%). Lumen's dividend is a sky-high 8.6%, largely because investors are nervous about this telecom stock. Those feelings are somewhat justified; revenue and profitability have been on the decline for years, ever since the company was formed out of the merger between CenturyLink and Level 3 Technologies. Landline phones, wholesale fiber leasing, and copper-based internet used to make up a large portion of revenue, which are declining in a big way.
However, Lumen is taking several actions to grow newer tech products while others decline. These include edge computing services, cybersecurity, and fiber infrastructure. A new highlight for Lumen is its Quantum Fiber broadband product for consumer broadband, which is growing nicely.
Later this year, Lumen will sell off two big assets: its Latin American operations and its incumbent local carrier (ILEC) business in 20 states across the Midwest and Southeast, both to private equity firms. The transactions will bring in about $7 billion in cash and allow Lumen to offload some of its highest-yielding debt.
Lumen will use that cash to de-lever its balance sheet further, as well as invest more in the Quantum Fiber business, which has shown solid signs of success. Management sees the overall consumer business returning to growth in the second half of 2023, and management expects overall revenue to return to growth by 2024.
That may seem like a long time from now, and it is a bit of a risk. However, Lumen trades at just six times earnings, and investors get paid more than 8% to wait. Unlike growth stocks that have crashed this year, Lumen is down less than 10% in 2022, since it was already so cheap to begin with. And if Lumen goes from revenue declines to revenue growth, the stock could rerate higher in a big way. That being said, investors will need to be patient, as that inflection is a couple years off. But an 8.6% yield and the prospect of a turnaround is nothing to sneeze at.
