It's official: The first half of 2022 was the worst performance for the start of a year since 1970. The S&P 500 Index fell 20.6%, and the Nasdaq Composite fared even worse with a negative 29.5% return. Investors are fretting over inflation and whether the U.S. Federal Reserve's aggressive monetary tightening policy will push the economy into recession.
In uncertain times, refocusing on the fundamentals can help. Well-established companies that generate ample profits and return it to investors via dividends and share repurchases can smooth out portfolio performance -- not to mention tee up strong returns once the economic clouds clear up. Three stocks that look like timely buys right now are IBM (IBM 0.16%), Qualcomm (QCOM 0.73%), and Skyworks Solutions (SWKS 1.21%). Here's why.
1. IBM: A rare winner so far in 2022
To be sure, IBM is no market-beating stock. In fact, it barely made shareholders any money for a long time, putting up a measly 11.7% total return (which includes dividends) over the last decade. But the old computing and software company is showing new signs of life. It actually managed a rare positive return in the first half of 2022, up 8.3% when including dividend payments.
What's the secret sauce IBM is cooking with these days? For one thing, it helps to have an incredibly sleepy but steady business when the rest of the market is in turmoil. But IBM has been making some moves under CEO Arvind Krishna that could change the narrative for the business. It completed the spinoff of some of its legacy managed-IT infrastructure assets (the company now known as Kyndryl) late in 2021. What remains is an IBM more squarely focused on cloud computing, a massive megatrend that will remain a focus of the business world for at least the balance of the 2020s.
IBM is no sizzling growth stock after this separation of some old business, but Krishna's fresh strategy appears sound. Revenue was up 8% year over year in the first quarter of 2022, driven by a 12% gain in the software segment. Free cash flow was $1.2 billion (a free cash flow margin of just 8.5%), but this figure should improve as one-time expenses associated with IBM's restructuring ease. With a dividend yield of 4.7% and shares trading at 15 times trailing 12-month free cash flow, IBM might be up your alley if investment income is what you're after.
2. Qualcomm: Not just a smartphone play anymore
For a company growing sales at a rapid rate (up 41% last quarter to $11.2 billion, and at least 30% forecast for the current quarter), Qualcomm stock is incredibly cheap. Shares currently trade for just 20 times trailing 12-month free cash flow.
Investors aren't without reason for letting this stock go for so cheap, though. The bulk of Qualcomm's sales come from the highly consumer-facing smartphone industry, and consumer spending has been showing signs of weakness as of late. Qualcomm's surge has a lot to do with 5G mobile networks and smartphone users upgrading their devices to take advantage of higher-speed connectivity. Eventually, that trend will lose steam.
Another concern is that Qualcomm itself had predicted it would steadily lose sales to Apple. The iPhone maker purchased the mobile modem chip business from Intel back in 2019 to bring connectivity chip design in-house. However, a recent report indicates Apple might be finding this more difficult than initially anticipated, and Qualcomm could wind up supplying connectivity circuitry to Apple for longer than it itself had forecasted.
Not losing Apple as a customer would be great news, but the real reason to be bullish on Qualcomm is its expansion into new markets like industrial connectivity and automotive. Both of these segments are growing at a rapid pace and are helping to diversify Qualcomm's business model. Besides offering stable growth prospects for the next few years, this semiconductor giant also pays a dividend yielding 2.3% a year and repurchases lots of stock to further boost shareholder returns. This is a fantastic addition to any portfolio right now.
3. Skyworks Solutions: Another smartphone chip company diversifying into new markets
Skyworks Solutions is another connectivity chip specialist that designs and manufactures circuitry for mobility of all kinds. Last summer, it also acquired the automotive and infrastructure business from industry peer Silicon Labs to diversify itself away from its historical reliance on smartphones.
The company was an early beneficiary of the 5G network rollout in the last couple of years, but its growth momentum in this department has slowed as of late. Revenue was up 14% year over year in the latest quarter, and the outlook for the next quarter implies growth of only 7% to 13%. This growth is being driven by its "broad markets" segment (everything besides smartphone chip sales), which represented 39% of total revenue in the last quarter, thanks in no small part to the acquisition last summer.
Though growth isn't as fast as it has been in the recent past, business is still expanding. And Skyworks also generates consistent profitability. Free cash flow profit margin was 20% in the last quarter, lower than typical as the company digests expenses associated with the Silicon Lab deal. But it was still ample cash to handily cover the dividend, which currently yields 2.4% a year. Skyworks has been repurchasing stock too ($418 million worth last quarter alone), further returning excess cash to shareholders.
I believe that will be money well spent given that Skyworks Solutions currently trades for just 15 times trailing 12-month free cash flow. A long-term growth story and consistent dividend increaser, this is another top tech dividend stock to buy right now as mobile chips find new use in lots of new devices besides the smartphone.
