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Technology isn’t usually a space investors associate with dividends. While this has been the case historically, dividend payments have been cropping up in recent years. Although many companies in this space still don’t pay dividends, there are some that have solid distributions on both an absolute and a relative basis.

We screened the Computer Software, Computers and Peripherals, E-Commerce, Electronics, Entertainment Technology, Foreign Electronics, Internet, Semiconductor, and Telecom Equipment Industries for companies in the technology area that pay material dividends. First, we looked for companies with dividend yields above 1.8% and then, to help ensure the dividends were sustainable, we limited the results to those corporations with long-term debt as a percentage of total capital below 25%.

The screen, simple as it is, netted 32 companies (see the list below) with yields ranging from just about 1.8% to above 5%. Long-term debt-to-total capital ratios ranged from nil to near the 25% limit. There was no particular correlation between debt and distribution. Of note, however, is the fact that yields drop quickly toward the market average—not surprising given the nature of the industry. We have chosen to highlight Qualcomm, Inc. (QCOM) and Cypress Semiconductor (CY). 

Qualcomm, Inc.

Qualcomm is a leading fabless (does not own or operate foundries for the production of silicon wafers) semiconductor designer and licensor of CDMA-based intellectual property to phone makers. In 1989, the company introduced CDMA or Code Division Multiple Access, one of the main technologies used to transmit a wireless user’s voice or data over radio waves using a public cellular wireless network. Cellular network technologies tend to build on prior iterations, which is why all phone makers using the current 3G wireless standards (WCDMA, HSDPA, HSUPA, HSPA+, etc.) as well as 4G Long Term Evolution (LTE), pay a low single-digit percentage of phone revenues to Qualcomm. In addition to collecting royalties on its IP, Qualcomm is also the dominant supplier of cellular modem (a.k.a. baseband) chipsets.

On March 4, 2014, Steve Mollenkopf became chief executive officer, and former CEO Dr. Paul E. Jacobs transitioned to executive chairman of the board of directors. Mr. Mollenkopf has been with the company for 20 of its 28 years in existence, and most recently held the titles of president and chief operating officer. We view Mr. Mollenkopf as a worthy successor.

After coming off a three-year top-line CAGR of more than 30%, management anticipates achieving five-year, top and bottom-line CAGRs of over 10%. The company appears to be basing this optimism on the speed at which LTE is being adopted, as well as continued success in emerging markets.

Nonetheless, investors appear to have a number of concerns. To start, many believe developed markets like the U.S. and Europe have become saturated, and there is little room for additional growth. We agree that most new handsets sold in these regions will be replacements, not upgrades. Further, there has been anecdotal evidence that the replacement cycle is getting longer, another negative for Qualcomm.

Despite these headwinds, the company remains the dominant player in most smartphone chipset categories by a wide margin. It has a solid presence in emerging markets and should continue to do well even if new entrants eat up some of its market share. All told, these neutrally ranked shares offer solid risk-adjusted long-term price appreciation potential.

Cypress Semiconductor Corp.

Cypress Semiconductor designs, manufactures, and markets a broad line of high performance digital integrated circuits used in smartphones, GPS systems, PCs and PC peripherals, audio and gaming devices, washing machines, and communications devices. Major products include its Programmable System-on-Chip platform (includes touchscreen controllers), high speed Static Random Access Memories (SRAMs), Programmable Logic Devices (PLDs), Programmable Read-Only Memories (PROMs), specialty memory, and timing devices.

Cypress finished 2013 with mixed results. Sales during the fourth quarter declined 7% from a year earlier, driven by normal seasonal declines in three of its largest divisions. Programmable Systems was hurt by yearend inventory adjustments, while the Memory Products division saw declines in its sync business. Volumes at the Data Communication Division were down, largely due to weaker demand for older USB products.

Partially offsetting these declines was a big jump from the company’s smallest segment, the Emerging Technology division. The group is beginning to add new customers that are ramping up designs.

After reporting back-to-back years of sales and earnings declines, we look for CY’s top- and bottom-lines to grow in 2014. The year will likely start off slow, owing to normal first-quarter seasonality, but as it progresses, we anticipate a comeback in high-end smartphone touch products. The company also looks for sales at the Emerging Technology division to double, as it continues to benefit from the addition of more customers.

After what we expect will be a slow start to the year, demand should begin to strengthen, boosting profitability in the second half. The equity also offers a good dividend yield of roughly 4.2%, and has wide recovery potential over the 3- to 5-year period.

 

Company Name Ticker Industry Name
CA, Inc. CA Computer Software
Compuware Corp. CPWR Computer Software
Microsoft Corp. MSFT Computer Software
Symantec Corp. SYMC Computer Software
Apple Inc. AAPL Computers/Peripherals
Hewlett-Packard HPQ Computers/Peripherals
Int'l Business Mach. IBM Computers/Peripherals
Seagate Technology STX Computers/Peripherals
ADT Corp. (The) ADT Electronics
AVX Corp. AVX Electronics
Harris Corp. HRS Electronics
Jabil Circuit JBL Electronics
Micrel Inc. MCRL Electronics
Daktronics Inc. DAKT Entertainment Tech
Canon Inc. ADR CAJ Foreign Electronics
Konami Corp. ADS KNM Foreign Electronics
Philips Electronics NV PHG Foreign Electronics
EarthLink Hldgs. ELNK Internet
Analog Devices ADI Semiconductor
Cypress Semic. CY Semiconductor
Intel Corp. INTC Semiconductor
Intersil Corp. 'A' ISIL Semiconductor
Linear Technology LLTC Semiconductor
Maxim Integrated MXIM Semiconductor
Microchip Technology MCHP Semiconductor

At the time of this article's writing, the author did not have positions in any of the companies mentioned.