They were once super powered companies posting incredible growth. Their stock price skyrocketed and made many investors rich. They also caused lots of damage and worries to other investors due to lots of volatility. When most techno stocks arrived on the market prior to the techno bubble, we were talking about page views and visitors. The more you had, the more your company was worth. The “free model” based on future potential of monetization riddled the market and led to one of the greatest bubbles in history.
They were once hungry for their cash and would not share with their precious bank accounts with investors. They claimed they needed this money to finance additional growth, to develop projects, buy competitors, etc. Based on financial academic studies, companies should always keep their money if they have a higher expected return project to invest in. In the opposite case, they should pay dividends. This is why techno stocks don’t usually appear on dividend growth investors’ radar. This is about to change.
Almost 20 years after the techno bubble, many “survivors” have become grown up companies and several of them started looking as stable as good old consumer staples companies. Companies like Microsoft (MSFT) who once swore to never pay dividends is now showing 12 years of consecutive dividend increases. We are not talking about a dividend aristocrat yet, but we can’t consider this company like a frivolous sky high techno stock. Microsoft has become a techno consumer staple selling many repetitive products to both institutional and retail customers. This is where the techno sector is heading; towards more products and repetitive purchases from the population.
At one point in time, I would not be surprised to see companies like Facebook (FB), Netflix (NFLX) or Amazon (AMZN) pay dividends in 5-10 years from now. In my opinion, Facebook has the innovating power of a 3M Co (MMM), Netflix will gather so many registered users they will run on infinite cash flow and Amazon will become the next Wal-Mart (WMT) with shipping warehouses throughout the world. These companies are currently building what is worth the most and we are not talking about their technological skills, I’m talking about a serious bond with their clients. They are using technology to sell consumable goods. Consumable goods are repetitive products generating a constant flow of income. This is why I believe techno stocks will become the next cherished sector for dividend investors.
Unfortunately, for each success story in the techno sector, we have dozens of flops. Nobody remembers MySpace, ICQ or Messenger. They were all there before Facebook. But technology goes very fast and scares lots of dividend investors for a very good reason. This is why this issue is not about high flying techno stocks, but rather about grown-up companies which are mature enough to share their immense cash reserves.
Many techno stocks have huge cash reserves. They like to benefits from this freedom of movements. After a while, many activist investors such as Carl Icahn bought stakes in these companies to invite them (read force) to pay dividends. On the one hand, we have companies building strong business models based on repetitive purchases and on the other, we have the same companies sitting on big piles of cash. This sounds like the perfect environment to find dividend growth. You can actually find both “dividend” and “growth”. We just have to be more cautious with our picks (I made a mistake with Garmin (GRMN) last year) as this is a sector that changes rapidly.
I recently did a research through this industry. I have concentrated my research around strong companies paying steady dividends. I’ve also included the telecom sector as it includes some dividend growing gems on both sides of the borders.
I’ve pulled out all companies showing the following criteria:
- Dividend yield between 2% and 10%
- 5 year dividend growth positive
- 5 year revenue growth positive
- 5 years EPS growth positive
The full list and a complete report about this industry is available to DSR members only. However, I’ve selected 2 companies of interest you might like:
COMPUTER MODELLING GROUP (CMG.TO)
Computer Modelling Group Ltd is a computer software technology company. The Company is engaged in the development and licensing of reservoir simulation software used by the oil & gas industry. They have 214 employees with 52% of their manpower dedicated to R&D. This small company doesn’t look like it but they show over 12 years of consecutive dividend payments and recently increased their payouts by 17.32% CAGR over the past 5 years. Their earnings and revenues are growing along the same trend (15.33% and 13.37%).
The Alberta based company is currently suffering from the province-wide economic slowdown. Still, they are able to post solid revenues and income. This is a non-conventional play, but as oil prices start to rise, we can expect CMG to benefit from this situation again. The stock is down 34% over the past 12 months leading to a very interesting yield over 4%. Maybe it’s time you look into it if you are looking inject more growth into your portfolio.
I personally like companies that are the leader in their industry. Intel owns 80% of the PC microprocessor business and it can use its leadership to effectively switch its business model towards the internet of things (IOTG). The company shows strong cash flow generation ability, putting most of its competitors on the slow road while INTC is driving the train of data centers and connectivity.
INTC could unlock its valuation model and eventually offer a greater multiplier to its shareholders. This will all depend on INTC’s capacity to develop IOTG in a scalable and profitable business model. The stock price could surge upon growth potential if Wall Street confirms INTC will grow faster as more devices become connected together.
This scenario may or may not happen as we are solely talking about potential here. However, the company remains a strong dividend payer in the meantime and dividend growth investors will be pleased by management’s shareholder friendly policy.
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