- By Panos Mourdoukoutas
Investors looking for income and growth in an ultra-low interest-rate environment should consider the three technology giants Cisco Systems (NASDAQ:CSCO), Taiwan Semiconductor Manufacturing (NYSE:TSM) and Texas Instruments (NASDAQ:TXN). They all pay dividend yields that beat 10-year Treasuries and are still growing.
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How to calculate the intrinsic value of a stock?
That's according to Paul Kutasovic, Professor of Finance at New York Institute of Technology.
Cisco Systems pays the highest dividend of all. "CSCO has less upside potential but over 3% yield and little downside risk to the stock," says Kutasovic. "It is a lot better than holding 10-year treasuries. And it's trading close to its intrinsic value."
3-year Revenue Growth (%)
3-year EBITDA Growth (%)
Current Operating Margin (%)
Average Annual Total Return (2010-2020)
ROIC-WACC (Economic profit)
Cisco has raised its dividend every year since 2014. The company has a strong income statement and a strong balance sheet, which includes plenty of cash. This means that Cisco has the funds to pay for these dividend hikes.
Still, Cisco is no longer the young start-up company of the 1990s. It's a large mature company running out of room to grow. And that may be the reason it returns funds to investors rather than investing them in new businesses.
Meanwhile, there's Taiwan Semiconductor Manufacturing, the world's largest foundry of customized chips, enjoying a near-monopoly position in chips have that use progressively smaller line widths in their circuits. "Taiwan Semiconductor Manufacturing Company Limited has had a big move up, and the dividend is no longer as attractive, but there is still some upside given its dominant manufacturing position," says Kutasovic. "I think they are moving into 7 nm."
Taiwan Semiconductor Manufacturing was the first company to apply Extreme Ultra-Violet (EUV) lithography.
That's the most recent innovation in chip manufacturing, which could help the company gain market share in the industry.
The problem is that Taiwan Semiconductor Manufacturing is trading close to 50% above its intrinsic value, and it is facing risks here, too. The semiconductor sector is a capital-intensive sector. This means that they have to invest heavily to reproduce its advantage.
Then there are the semiconductor cycles that can cause a great deal of fluctuation in the stock price.
The same is true for Texas Instruments, a leading producer of analog chips, which currently yields 2.49%.
Nonetheless, Texas Instruments is well-positioned to benefit from the Internet of Things, an emerging set of technologies with broad applications.
That could, perhaps, explain their rising economic profit, which stands at 37.07 recently, as seen on the table above.
Then there's Texas Instruments' shareholder-friendly management, as demonstrated by its commitment to return 100% of free cash flow to shareholders in the form of dividends and share repurchases.
The problem is that, like Taiwan Semiconductor Manufacturing, Texas Instruments trades close to 50% above its intrinsic value. This means that investors have no room for error in the short-run.
The bottom line is that hunting for dividends in an ultra-low interest rate environment is tricky, as low-interest rates have inflated high-yield equities. Investors should be reminded of Warren Buffett (Trades, Portfolio)'s wise words, "price is what you pay; value is what you get."
Disclosure: I own shares of Cisco Systems, Texas Instruments, and Taiwan Semiconductor Manufacturing.
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This article first appeared on GuruFocus.