A lot of tech stocks were crushed last year as rising interest rates drove investors toward more conservative investments. Overlooked amid that exodus from the sector was that many blue chip tech stocks held up well throughout previous economic downturns, and pay attractive dividends, too.
Admittedly, dividend stocks generally lost a bit of their luster over the past year as rising interest rates made high-yielding CDs, Treasury bills, and bonds more attractive. However, I believe tech giants Cisco Systems (CSCO -0.50%), Qualcomm (QCOM 1.45%), and IBM (IBM -1.05%) could still offer significantly better long-term returns than those fixed-income investments.
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1. Cisco Systems
Cisco is the world's largest producer of networking switches and routers. It also bundles a wide variety of cybersecurity, analytics, and collaboration services with its own hardware. It operates in a highly commoditized market, but its market dominance, scale, and expanded software business enable it to generate stable revenue and profits.
Cisco's business suffered a slowdown throughout its fiscal 2022 (which ended last July) as supply chain constraints throttled its hardware sales and squeezed its margins. But it overcame those issues during fiscal 2023, and guided for revenue growth in the 10% to 10.5% range in the soon-to-end year, and for adjusted earnings per share (EPS) growth of 13% to 14%. It also recently reiterated its long-term outlook that it will maintain annualized growth in revenue and adjusted EPS of at least 5% to 7% for the period from fiscal 2021 through fiscal 2025.
That's a bright outlook for a stock that trades at just 12 times forward earnings. Cisco's dividend currently yields 3.1%, and it's raised its payout annually for over a decade. It also bought back nearly 12% of its shares outstanding over the past five years. Cisco's scale, predictable growth, low valuation, and high dividend all make it a great blue chip tech stock to hold through both bear and bull markets.
2. Qualcomm
Qualcomm is one the world's largest producers of mobile systems on a chip (SoC), which bundle together an Arm-based CPU, a GPU, memory, and a baseband modem, among other things. It also sells stand-alone baseband modems to smartphone makers that don't use its chips, and it generates licensing revenue from its massive portfolio of wireless patents.
Qualcomm experienced a major growth spurt in 2020 and 2021 as smartphone makers launched new 5G devices. But that phase of the upgrade cycle ended in 2022, and its slowdown was exacerbated by macroeconomic headwinds globally and new COVID lockdowns in China.
The company's revenue and adjusted EPS rose 32% and 47%, respectively, in its fiscal 2022 (which ended in September), but analysts expect its revenue and adjusted EPS to decline by 24% and 38%, respectively, in its fiscal 2023 as the cyclical slowdown intensifies. But next year, its revenue and adjusted EPS are expected to grow by 9% and 16%, respectively, as the smartphone market stabilizes. The growth of its smaller automotive and Internet of Things (IoT) chipmaking businesses could amplify that recovery.
Qualcomm faces some near-term challenges, but its stock trades at just 12 times forward earnings, its dividend at current share prices offers an attractive yield of 2.8%, and it has raised its payouts annually for two decades. It also repurchased 24% of its shares outstanding over the past five years. In other words, this could be a great buying opportunity for value-seeking income investors.
3. IBM
IBM's performance as an investment over the past decade was dismal. The stock declined by more than 30% as its enterprise software business was disrupted by cloud-based competitors. It also focused too much on cutting costs instead of investing in growth.
But under CEO Arvind Krishna, who took the helm in 2020, IBM made some sweeping changes. It spun off its struggling business infrastructure services division as Kyndryl, restructured its remaining divisions, and expanded its Red Hat subsidiary with new services for the hybrid cloud and AI markets.
It also plans to replace nearly 8,000 of its employees with AI-powered services over the next five years. The cuts were deep, but IBM's top line is finally growing again. In 2023, it expects its revenue to rise by 3% to 5% on a constant-currency basis as its annual free cash flow increases by 13%. Analysts expect its revenue and adjusted EPS to both grow by about 3%.
Those growth rates might seem anemic, but Big Blue's business could finally be stabilizing after years of bad business decisions and declining revenue. Its stock still looks cheap at 14 times forward earnings, it pays a high forward yield of 4.9%, and it's raised its payout annually for nearly three decades. It also reduced its share count by 17% over the past 10 years, but it will likely dial back its stock buybacks to conserve more cash for its new hybrid cloud and AI strategies.
