2018 was a rough year for tech stocks, which were hammered by concerns about escalating trade tensions, slower enterprise spending, and rising interest rates. Yet many mature tech stocks with higher dividends fared better than their peers with low or non-existent dividends. So today, let's take a closer look at three companies that should significantly raise their dividends this year -- Oracle (NYSE: ORCL), NVIDIA (NASDAQ: NVDA), and Apple (NASDAQ: AAPL).
Over the past few years, Oracle pivoted away from its slower-growth, on-premise businesses (like database hardware and software) toward its higher-growth cloud services. However, that turnaround strategy stalled out and Oracle stopped disclosing the growth of its closely watched SaaS (software as a service), IaaS (infrastructure as a service), and PaaS (platform as a service) units last year.
Image source: Getty Images.
Instead of pouring more cash into its cloud services or acquiring smaller companies to boost its flat sales growth, Oracle decided to repurchase a lot of stock. That's why analysts expect its revenue to dip 1% this year but its earnings to climb 9%.
Simply put, Oracle fell into the same trap as the old IBM -- it's "buying" earnings beats instead of aggressively trying to counter Amazon and Microsoft in the cloud market. But at least IBM pays a generous forward dividend yield of 5.5% compared to Oracle's paltry forward yield of 1.7%.
Instead of repurchasing shares, Oracle should raise its dividend. It only spent 22% of its free cash flow (FCF) on its dividend over the past 12 months, so it can easily afford to double its yield to more respectable levels. A dividend hike won't solve Oracle's other fundamental issues but could lure some income investors back to the stock.
NVIDIA had a terrible third-quarter financial report last November. The chipmaker reported its slowest revenue growth in over two years and guided for negative sales growth in the fourth quarter. NVIDIA mainly attributed those declines to the end of the cryptocurrency boom, which flooded the market with cheap GPUs that dented its core gaming revenues. It also warned that it would take one or two quarters for its gaming business to stabilize.
That triple whammy of bad news -- along with the broader market decline -- cut NVIDIA's stock in half over the past three months. The drop reduced NVIDIA's forward price-to-earnings (P/E) ratio to 20, which still looks high relative to Wall Street's projections for 6% sales growth and a 1% earnings decline next year. Its low forward dividend yield of 0.5% also doesn't offer much downside protection.
Like Oracle, NVIDIA spent a lot of its cash on buybacks -- which were poorly timed over the past year. Instead, it makes more sense for NVIDIA to raise its dividend, which used up just 11% of its free cash flow (FCF) over the past 12 months, to more respectable levels. A higher dividend could appease investors until NVIDIA's other long-term catalysts -- including its new high-end CPUs, AI chips, and driverless efforts -- finally kick in.
Apple recently plunged after a first-quarter guidance cut that called for its first annual sales decline in over two years. CEO Tim Cook blamed the drop on a soft Chinese economy and trade tensions, but critics quickly noted that top Chinese smartphone makers like Huawei, Oppo, Vivo, and Xiaomi still were growing.
Image source: Apple.
This indicates that Apple's real problem in China is tougher competition and throws cold water on the company's core growth strategies of selling more iPhones in China and growing its services revenue to offset its slowing hardware sales.
Apple still has other irons in the fire -- including the growth of its Apple Watch ecosystem, its connected car and home efforts, and the expansion of its streaming media platforms. It also can easily acquire other companies with its $237 billion in cash to boost its top-line growth again. The stock also is cheap, at 10 times forward earnings.
However, Apple's forward dividend yield of 1.9% still probably doesn't appeal to income investors, who can get much higher rates from bonds. Apple only spent 21% of its FCF on its dividend over the past 12 months, so it can easily double its yield to match the yields of other mature tech stocks and reward patient investors.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Amazon and Apple. The Motley Fool owns shares of and recommends Amazon, Apple, and Nvidia. The Motley Fool owns shares of Microsoft and Oracle and has the following options: long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, and long January 2020 $30 calls on Oracle. The Motley Fool has a disclosure policy.