By Bryan Perry, Cash Machine
With the bull market starting the fourth quarter of 2017 and the ninth year of its extended rise, portfolio managers are eager to own the crème-de-la-crème blue-chip stocks that offer the best total returns, combining capital appreciation with dividend income.
The higher the market trades, the more investors should expect increased volatility. Fewer stocks will lead the market as it climbs, and I expect blue-chip stocks of companies that double their dividend payouts every five to eight years to be among those coveted holdings.
Consider the semiconductor and semiconductor equipment sectors. These two areas have been leaders within the Nasdaq for most of 2017. Some of these stocks have had torrid runs and trade at high levels that invite longer periods of consolidation to digest gains.
For money managers seeking to stay invested in the chip space, but interested in finding deeper value, one idea is to turn to some of the legacy chipmakers and chip-equipment makers that trade at much lower price-to-earnings (P/E) ratios, as well as hiking their dividends and increasing their stock repurchase plans.
One such stock that comes to mind is Texas Instruments (TXN). The company designs, manufactures and sells semiconductors to electronics designers and manufacturers worldwide, and its products are found in hundreds of commercial and consumer products primarily through the application of analog and embedded processing. Most traders don’t think of TXN as sexy enough to trade compared to NVIDIA Inc. (NVDA), the Cinderella chip stock of 2017.
What is compelling about Texas Instruments is that the company is breaking out of a multi-month trading base on news that the chipmaker raised its quarterly dividend by 24% and added a hefty share buyback authorization. The company will increase its quarterly dividend to 62 cents per share from 50 cents. Texas Instruments’ board of directors also added $6 billion in share repurchase authority, in addition to the $44.6 billion in purchasing authority that remained at the end of June 2017.
This is mouthwatering news to institutional investors who want stocks that offer yields at or near 3.0% and where the company itself is sitting on the bid, buying back its own shares, which reduce the number of outstanding shares and put a net positive impact on earnings. As the chart below shows, the news put a fresh fire under TXN’s shares and it now has look of a stock that can trade 10-15% higher by year’s end. That kind of fresh breakout chart is hard to find in the broader tech sector. For many stocks, “the easy money has already been made.” That is not the case for TXN.
Companies the size and quality of TXN that raise their dividends by 24% receive global appeal from the financial community. It is exactly what long-term pension money is looking for, namely, growth at a reasonable price coupled with a robust dividend and stock repurchase plan.
Understand that not all legacy technology stocks are of equal significance. They must continue to reinvent themselves and adapt to new areas of growth, like artificial intelligence. Texas Instruments will be a big player in this fledgling technology. Other big legacy companies such as IBM, Cisco Systems and Hewlett-Packard have vast embedded systems that demonstrate little or no growth. Yet they must service those customers. That is why the stocks struggle and dividend growth stalls out. Not every big-name tech stock has its day in the sun in a changing technology world.
The market has been dominated by the FANG stocks of Facebook (FB), Apple (AAPL), Netflix (NFLX) and Google (GOOG). True to form, they have provided great year-to-date results. However, except for NFLX, these market favorites are trading off their highs. A couple are showing increased technical deterioration. Shares of Apple (AAPL) and Google (GOOG), in particular, have shown strong signs of deterioration of late, while shares of Texas Instruments and blue-chip chipmaker Analog Devices (ADI) have been breaking out to the upside.
I’m not saying the FANG stocks won’t reassert themselves and lead a Santa Claus rally. They very well might. But for now, they look crowded and tired. The smart money is moving into big-name tech stocks that have hefty dividend payouts and that are staying innovative within their markets, as well as posting strong earnings. I think it’s always good to follow the money. Heading into the fourth quarter, it’s also good to see trusted names emerging as new leaders.
Bryan Perry is an income-investing expert who writes a monthly investment newsletter, Cash Machine.