Why “old tech” might surprise income investors
For decades, dividends have largely been associated with companies from more mature areas of the market such as utilities or telecommunications. Meanwhile, technology has long remained an afterthought. But what happens when tech grows up?
Areas of the sector are beginning to mature, with names such as Microsoft, Oracle, and Intel distributing an increasing proportion of their earnings to shareholders. For income investors, the numbers are compelling.
Zoning in on the US tech sector, since 2007:
- The income paid to investors has risen from $64 billion to $396 billion.
- The proportion of earnings paid out as income (the payout ratio) has risen from 11% to 36%.
- The share of total dividends paid as a proportion of the overall market has tripled from 5% to 15%.
Dividend yield is only half the story
We have long warned investors of the dangers of focusing on headline yield in isolation, particularly the risk of falling into value traps. Conversely, opportunities may be missed if a starting yield appears too low.
This is the case with US tech stocks. If we look at total yield, i.e. both dividends and share buybacks, income investors will undoubtedly be pleased with a healthy 4.1% versus a rather uninspiring 1.4% dividend yield.
Making the distinction between old and new
Given the differing characteristics and dispersion in valuations, it is important income investors remain highly selective in their approach, and make the distinction between 'old' and 'new' tech stocks. Old tech stocks typically pay a dividend, while new tech stocks do not. New tech currently trades at an expensive 41x earnings, versus 21x for old tech.
The story in charts
The tech sector distributes more earnings through buybacks than non-tech sectors.
At the same time, its share of total dividends paid continues to grow.
The supply of tech companies paying dividends continues to rise.
Investors need to be selective, given the vastly different characteristics of payers and non-payers.
Schroders' multi-asset income team is a firm believer that investors need to look beyond headline yield. Instead the focus should be on the sustainability of the income stream and potential for income to grow.
From this angle, old tech remains highly attractive as more tech names move up the quality spectrum; stable, predictable cash flows enable management to distribute a higher proportion of their earnings.
Payout ratios in the US tech sector stand at just 36%, providing plenty of room to grow, compared to traditional income payers such as utilities at 74% and telecommunications at 69%. However, valuations within new tech are almost double that of old, meaning a highly selective approach is required within the sector.
Any security(s) mentioned above is for illustrative purpose only, not a recommendation to invest or divest.
This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The views and opinions contained herein are those of the author(s), and do not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. The material is not intended to provide, and should not be relied on for investment advice or recommendation. Opinions stated are matters of judgment, which may change. Information herein is believed to be reliable, but Schroder Investment Management (Hong Kong) Limited does not warrant its completeness or accuracy.
Investment involves risks. Past performance and any forecasts are not necessarily a guide to future or likely performance. You should remember that the value of investments can go down as well as up and is not guaranteed. Exchange rate changes may cause the value of the overseas investments to rise or fall. For risks associated with investment in securities in emerging and less developed markets, please refer to the relevant offering document.
The information contained in this document is provided for information purpose only and does not constitute any solicitation and offering of investment products. Potential investors should be aware that such investments involve market risk and should be regarded as long-term investments.
Derivatives carry a high degree of risk and should only be considered by sophisticated investors.
This material, including the website, has not been reviewed by the SFC. Issued by Schroder Investment Management (Hong Kong) Limited.