Many high-growth tech stocks have been routed this year as rising interest rates have driven investors toward more conservative sectors. However, mature blue-chip tech stocks -- which are often owned for income and stability instead of feverish growth -- fared better throughout that downturn.
Today I'll examine three income-generating tech stocks which fit that description -- Oracle (ORCL -0.97%), Texas Instruments (TXN -2.44%), and Broadcom (AVGO -4.31%) -- and explain why they're still worth buying in June as the U.S. teeters on the brink of a recession.
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1. Oracle
A few years ago, Oracle resembled IBM (IBM 0.06%): an aging enterprise software company that was trying to offset the sluggish sales of its legacy on-site products by expanding its higher-growth cloud services. However, Oracle successfully made that transition, while IBM was forced to spin off a large portion of its legacy businesses to streamline its operation.
After flatlining in fiscal 2019 and 2020, Oracle's revenue rose 4% in fiscal 2021 and grew another 5% in fiscal 2022 (which ended this May). Its adjusted earnings per share (EPS), which were buoyed by consistent buybacks, also increased 21% in fiscal 2021 and 5% in fiscal 2022.
Oracle's growth accelerated because the robust growth of its OCI cloud infrastructure platform, Fusion enterprise resource planning (ERP) services, and NetSuite ERP services all offset the slower growth of its older on-premise database software products. Its recent acquisition of Cerner will further expand that higher-growth ecosystem into the healthcare IT services sector.
Oracle expects its cloud services revenue to rise 30% on an organic basis this year, accelerating from its 22% growth in fiscal 2022, and analysts expect its full-year revenue and EPS to grow 18% and 63%, respectively.
Those growth rates should cool off to the single-digit levels after it laps its acquisition of Cerner, but Oracle's stock still looks cheap at 18 times this year's earnings. It doesn't raise its dividend every year, but its healthy forward yield of 1.8% should make it a stable income play for a volatile market.
2. Texas Instruments
Texas Instruments sells analog and embedded chips for the automotive, industrial, communications, and consumer electronics markets. Its chips aren't expensive or powerful, but they support crucial features like power management services, data transfer tools, and wireless communications.
TI generates most of its revenue from the auto and industrial sectors. Over the next few years, vehicles and factory robots will require more analog and embedded chips as they become more powerful, more autonomous, and more deeply connected to the Internet of Things (IoT).
TI manufactures most of its own chips at its first-party foundries, which prevents it from getting stuck in traffic jams at third-party contract chipmakers. Its ongoing transition from 200mm to 300mm wafers should also reduce its long-term production costs by about 40% and constantly boost its gross margins.
TI's well-diversified business generates plenty of cash, and it usually returns all of its free cash flow (FCF) to its investors through buybacks and dividends. Between 2004 and 2021 it grew its FCF per share 12% annually, reduced its outstanding shares by 46%, and raised its dividend every year. It currently pays a forward dividend yield of nearly 3% and trades at just 18 times forward earnings.
Analysts expect TI's revenue and EPS to rise 5% and 8%, respectively, this year, so it should remain a good defensive play even as concerns about slower PC sales rattle other chipmakers.
3. Broadcom
Broadcom is another diversified chipmaker that produces a wide range of chips for the data center, networking, software, storage, and industrial markets. But over the past few years, it evolved into an infrastructure software giant by acquiring CA Technologies and Symantec's enterprise security business. It also recently agreed to buy VMWare (VMW) for $61 billion to expand that growing segment into the hybrid cloud market.
Broadcom's revenue has risen by the double digits over the past seven quarters, and most of that growth was driven by robust demand for its chips across the cloud, data center, and wireless markets. It also relied on Apple (AAPL -1.22%) for about 20% of its revenue last year, so robust sales of iPhones, iPads, and Macs -- which all use Broadcom's wireless chips -- generated additional tailwinds for its semiconductor business this year.
Analysts expect Broadcom's revenue and EPS to rise 20% and 68%, respectively, this year, before factoring in its planned takeover of VMWare. If that acquisition closes, Broadcom will generate about half of its revenue from infrastructure software -- compared to 26% in fiscal 2021 -- and that shift could reduce its dependence on Apple and the cyclical semiconductor market.
Broadcom's stock trades at just 20 times forward earnings, and it pays a hefty forward dividend yield of 3.3%. The company (and its predecessor Avago) has consistently raised its payout annually for more than a decade, and it should remain a rock-solid income play for the foreseeable future.
