What are we looking for?
Investors often associate information technology with high-flying growth stocks, but many companies in the sector pay dividends, have low or reasonable debt levels, offer attractive valuations, and some have very stable and recurring business models – think Apple Inc. with its iPhones, for example, or Visa Inc. and Mastercard Inc. with their payment processing.
A recent flurry of earnings results from IT companies prompted my associate Allan Meyer and I to revisit the sector using our investment philosophy focused on safety and value.
The screen
We started with U.S-listed equities in the GICS Information Technology sector with a market capitalization of US$40-billion or more, sorted from largest to smallest. We view market capitalization as a safety factor – larger companies tend to be more liquid and less volatile.
Dividend yield is the annualized projected dividend divided by the share price. We like to get paid while we wait for appreciation and dividends generally reflect safety and stability. All companies listed pay a dividend.
The debt-to-equity ratio is also a safety measure. A smaller number is better. As we like to tell clients, it’s difficult to go bankrupt when you have little or no debt.
Free cash flow to enterprise value (FCF/EV) is a valuation metric. A higher number is better. Free cash flow reflects the cash available to investors after considering all the costs related to doing business and we believe it is more difficult to manipulate compared with earnings-based measures. Enterprise value is a measure of a company’s total value. This metric is one of the cornerstones of our investment philosophy – “free cash flow is king,” as we like to say.
The price-to-earnings ratio is another valuation metric; the lower the number, the better the value.
Earnings momentum is the change in annualized earnings over the past quarter. A positive number indicates earnings are increasing, and vice versa for a negative number. It may hint at future dividend raises, or cuts and share price appreciation, or depreciation.
Lastly, we included the 52-week total return to track performance as well as the average and median for all metrics to allow for better comparability.
What did we find?
Cisco Systems Inc., Intel Corp. and Broadcom Inc. score well across the board for safety and value. International Business Machines Corp. has the highest yield and best value on both valuation measures, but also the most debt. The sector as a whole boasts positive total returns over the past 52 weeks with the exception of Nvidia Corp.
Exchange-traded funds are an option for investors that like the sector but prefer to diversify away individual security risk. BlackRock’s iShares U.S. Technology ETF (IYW) offers exposure to U.S. electronics, computer hardware and software, and IT companies.
Investors should contact an investment professional or conduct further research before buying any of the securities listed below.
Sean Pugliese, CFA, is an investment portfolio manager at Wickham Investment Counsel, helping individuals, families and other investors.
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