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3 Tech Leaders With Growing Dividends and Stock Buybacks

Sunday - 5/5/2013, 3:41pm  ET

The tech sector has changed materially over the last years, many companies have grown into big and powerful cash flow machines, generating more money than they need to reinvest in the business. This has created big opportunities for growing dividends and share repurchases in the industry, and these three tech leaders look particularly attractive from that point of view.

Modern engineering at Apple

Apple has experienced slowing growth lately, although the iPad still firing on all cylinders, the iPhone is clearly maturing. Unfortunately, Tim Cook has already said that investors and consumers will have to wait until fall for new and exciting products with more growth potential.

But the good news is that the company has decided to finally reward investors for their patience, while product engineers keep working on the next launches the company has resorted to another kind of engineering - the financial kind – in order to better allocate its financial resources.

The Cupertino giant will be issuing low-cost debt in order to increase its dividends and repurchase program. The new quarterly dividend of $3.05 means a dividend yield of 2.7% at current prices, and things look even more attractive if we include buybacks into the total yield equation.

Apple increased its buyback program to $60 billion through the end of 2015; a steep upgrade from the $10 billion plan announced last year. At current prices, the company could repurchase almost 15% of shares outstanding for that amount.  Apple will issue more stock for employee compensation, and the total amount of shares repurchased will depend on the timing of the transaction and the evolution of the stock price during that period, so we can´t assume a 5% annual reduction in the amount of shares outstanding through 2015.

However, even under conservative assumptions, let´s say for example that the company reduces only 3.3% of shares outstanding over the next twelve months; the total yield – dividends plus buybacks – could easily be near 6% over the next year. That´s quite an attractive yield for a company which had no dividends or buybacks a couple of years ago.

And it doesn´t end there, Apple trades at a P/E ratio near 10, which is a larger than 30% discount to the company´s 5 year average P/E around 15 and even cheaper in comparison to the S&P 500 index, which carries a P/E ratio of 17. There is a lot of upside potential in Apple, especially if the company manages to reignite growth over the next quarters.

IBM: increasingly big money

IBM matured a long time ago, back in the nineties the company has decided to focus on profitability and value added businesses like software and services as opposed to increasing sales at the expense of margins in commoditized areas like hardware.

And the strategy paid off, IBM has become an undisputed leader in its industry: according to Interbrand the company owns the second most valuable brand in the world behind Coca-Cola, and it counts each of the Fortune 2000 companies as clients.

With expanding profit margins came growing dividend payments. The current quarterly dividend of $0.95 means a yield near 2% on a forward basis, which doesn´t sound extraordinary, but IBM has consecutively increased payments for the last 18 years and the payout ratio below 20% of earnings leaves plenty of upside room, so investors in IBM have good reasons to expect further dividend increases over the next years.

And that´s only part of the capital distribution program, over the last twenty years the company has reduced by half the amount of shares outstanding, which is an amazing achievement.

IBM has recently announced $5 billion in additional funds for use in the company's stock repurchase program, this is in addition to the $6.2 billion remaining at the end of March from a prior authorization. The company also has plans to request an additional share repurchase authorization at the October 2013 board meeting.

Since 200, IBM has returned over $150 billion to shareholders in the form of dividends and share repurchases, considering that the current market cap is around $223 billion, this bodes well in terms of total returns for investors.

Mobile growth for these dividends

While device manufacturers like Apple and Samsung fight each other for dominance in smartphones and tablets, Qualcomm doesn´t need to worry too much about that competition since it´s a well entrenched supplier for both companies. This provider of chips and technologies for mobile devices has many years of exciting growth ahead of it as the mobile revolution expands into emerging markets.

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