Investors often see the tech industry as a high-growth area. And for good reason, as some of the largest companies in the world are located in the region. The downside to such high growth is that investors are often willing to pay a premium multiple, but tend to get out at the first sign of trouble. Outside of healthcare, no industry is better positioned to withstand the challenges of 2022 than technology stocks, which are down about 42% year-to-date (YTD).
The good thing about a downturn is that there are quality tech stocks at much more reasonable valuations now. These stocks also offer meaningful income levels along with strong total return potential, which should appeal to value and dividend growth investors.
This article examines three tech stocks that yield more than 3% and deliver double-digit annual returns.
first of all Cisco (Nasdaq:CSCO), one of the largest high-performance computer network systems in the world. The company is valued at $171 billion and has annual revenue of about $54 billion.
Cisco has long been the most dominant name in enterprise networking. This has been the case for a long time, and it is estimated that the vast majority of data transmitted over the Internet over the past three decades has been done this way through the company’s products. So Cisco’s switches and routers are very entrenched in the industry.
That said, the company has worked hard to go beyond hardware. This includes products such as intertwined cloud storage and security products. This makes it difficult for customers to switch suppliers without incurring high switching costs.
Cisco has also transformed into more of a software-as-a-service company, which allows for recurring revenue streams and helps remove some of the cyclical nature of its business. Deferred revenue has been growing at a strong rate for some time. Cisco’s deferred revenue, for example, rose 11% to $23.3 billion in the fourth quarter of fiscal 2022.
The company also has one of the best balance sheets in the industry. Cisco ended the fiscal year with total assets of $94 billion, including nearly $19 billion in cash and equivalents, total liabilities of $54 billion, and long-term debt of just $8.4 billion.
Given the strength of its business and the company’s ability to deliver smoother revenue results, we believe Cisco is well positioned to deliver 6% earnings growth, close to the long-term average.
Cisco’s dividend has grown for 12 consecutive years.The current stock yield is 3.6%, which is double the average yield of 1.8% S&P 500. With a projected payout ratio of 43%, the company’s dividend is likely to continue to grow.
The final component of our expected return model is valuation. Historically, Cisco has traded at a price-to-earnings (P/E) ratio of just over 13. Our fair value target is 14x P/E given the positive factors in the company’s favor. Given that shares trade at 11.9 times earnings, this implies a 3.3% annual tailwind from multiple expansions over the next five years.
Overall, we expect Cisco to deliver a 12.4% annual return over the next five years, driven by 6% earnings growth, a 3.6% starting yield, and low-single-digit contributions from multiple expansions.
Skyworks Solutions (SWKS)
The next technical name to consider is Skyworks Solutions (Nasdaq:SWKS), a leading semiconductor company. The company is valued at more than $13 billion, and revenue last year was just over $5 billion.
Skyworks Solutions designs and sells semiconductor products for a variety of customers around the world. The company’s amplifiers, antenna tuners, converters, modulators, receivers and switches are used in end markets such as automotive, connected home, defense, industrial, medical and smartphones.
Of these markets, smartphones are probably the most important at the moment. This is because of the ongoing 5G deployment. Most major carriers have turned on 5G service, but customer upgrades to devices that can access the network are still in the works. It will take time for most customers to purchase 5G equipment, which should be a tailwind for Skyworks Solutions’ business.
There will be significant competition in the 5G space, but the company’s expertise, scale and scale should play to its advantage as more and more people turn to the service. Skyworks Solutions products are used by some of the largest technology companies involved in 5G, such as apple (Nasdaq:apple), which has led the company to partnerships with some of the top smartphone makers.
Skyworks Solutions has increased EPS at a high rate over the past decade. However, given the company’s high base to start with, we believe earnings growth of 5% is more likely going forward.
The company has raised its dividend for 10 consecutive years, and the stock currently yields 3.1%, one of the highest yields in its history. An extremely low payout ratio of 21% is expected, leaving plenty of room for Skyworks Solutions to continue increasing its payout to shareholders.
The company’s stock trades at just 7.3 times this year’s expected earnings per share. With a fair value P/E ratio of 12x, we believe Skyworks Solutions’ multiple expansions over the next five years will add 10.5% annual returns.
Overall, Skyworks Solutions expects to return 18.1% annually over the next five years. That’s due to 5% earnings growth, a 3.1% starting yield, and a low double-digit valuation tailwind.
Texas Instruments (TXN)
Our final technical name is Texas Instruments (Nasdaq:Texas), one of the largest semiconductor companies in the world. The $145 billion company has generated nearly $20 billion in revenue over the past 12 months.
Texas Instruments has two business units. Products from the analog division help manage power in electronic systems and measure signals that allow information to be transmitted or converted. The Embedded Processing segment manufactures semiconductor chips that can be used in a variety of applications.
The company’s products are used in a number of different fields, including automobiles, which have greatly increased in complexity. This will require more advanced components to meet the needs of manufacturers. Other important end markets include industrial applications and communications services.
Texas Instruments has also invested heavily in designing more advanced chips, which has helped cement its position in the industry. This has resulted in strong margin performance over a long period of time. The company’s EPS has compounded at a double-digit rate over the past decade, but we forecast earnings growth of 7.5% as we believe this builds some protection for what is typically a cyclical business.
Texas Instruments is yielding 3.2% today. The company’s 19-year streak of dividend increases is the longest in the tech industry, and the growth rate has been strong over the long term. The projected payout ratio in 2022 is 52%.
The stock has a price-to-earnings ratio of 16.9. We believe the fair value is close to 20 times P/E, which is close to historical valuation. Reverting to our target P/E ratio would add 4.3% annual returns going forward.
As a result, TI expects to deliver an annualized return of 14.7% through 2027, driven by 7.5% earnings growth, a 3.2% dividend yield, and low-single-digit contributions from an expanding multiple.
As of the date of publication, Bob Ciura does not hold (directly or indirectly) any positions in the securities mentioned herein. The views expressed in this article are those of the author and are subject to the InvestorPlace.com publishing guidelines.