Traders work on the floor of the New York Stock Exchange in New York, U.S., on Wednesday, Dec. 3, … [+]
Investors searching for yield in a low-interest-rate environment should take a close look at three technology leaders — Cisco, Taiwan Semi, and Texas Instruments.
That’s according to Greg Powell, Deputy CIO at Miller/Howard Investments.
“Cisco is a leading producer of switching and routing products, both categories that should continue to grow for years with the expansion of both cloud computing and the internet in general,” says Powell. “Cisco has traded off due to a softening in enterprise tech spending but we expect demand to rebound, as it always has in the past. Cisco yields 3.1% and has raised its dividend every year since 2014.
Meanwhile, the company has a strong income statement, and a strong balance sheet, which includes $28 billion in cash. This means that Cisco has the funds to pay for these dividend hikes.
But these hikes may be a sign of weakness rather than a sign of strength. Cisco is no longer the young start-up company of the 1990s, seizing the emerging opportunities of the Internet era. It’s a large mature company running out of room to grow. And that may be the reason it returns funds to investors rather than investing them in new businesses.
Cisco may end up like IBM, as was discussed in a previous piece here.
If that turns out to be the case, investors could lose a great deal of money, as the dividend won’t be sufficient to cover the equity losses.
Still, there’s Taiwan Semi (TSM), with a 3% dividend yield. “Taiwan Semi is the world’s largest chip foundry, manufacturing semiconductors based on their clients’ designs,” says Powell. “As technology has evolved, chips have used progressively smaller line widths in their circuits.”
And that, says Powell, is a less competitive area in the semi-space. “Fewer and fewer companies have been able to manage the increasingly tight specifications,” he says. “Taiwan Semi was the first company to implement Extreme Ultra-Violet (EUV) lithography, the most recent industry innovation. Taiwan Semi’s technical leadership should propel its market share to new heights in this competitive industry.”
But there are risks here, too. The semiconductor sector is a capital-intensive sector. This means that TSM has to invest heavily to reproduce its advantage.
Then there are the semiconductor cycles that can cause a great deal of fluctuation in the price of the stock.
The same is true for Texas Instruments (TXN) is a leading producer of analog chips, which currently yields 3.1%.
Nonetheless, Powell is optimistic about TXN, due to the company’s strong presence in the emerging technologies used the Internet of Things and autonomous vehicles. “The Internet of Things and autonomous vehicles are two of the trends driving high demand for analog chips. Texas Instruments should benefit from these tailwinds,” he says. “TI management is very investor-friendly with an often-repeated commitment to return 100% of free cash flow to shareholders through dividends and share repurchases.”