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What are we looking for?

U.S. information-technology companies that hew to our investment philosophy focused on safety and value.

The screen

In our analysis, my associate Allan Meyer and I started with U.S.-listed equities in the IT sector with a market capitalization of $100-billion (U.S.) or more, sorted from largest to smallest. We view market capitalization as a safety factor, larger companies tend to be more diversified and less volatile.

Dividend yield is the annualized projected dividend payment divided by the share price. Allan and I like to get paid while we wait for capital appreciation and dividends generally reflect safety and stability.

Debt to equity is also a safety factor. It is total debt outstanding divided by shareholders' equity. A smaller ratio indicates a company has lower levels of debt or leverage and a number under 100 implies a company has enough equity to pay its debt obligations. As Allan and I like to tell clients, it is difficult to go bankrupt without owing any debt obligations.

Price to earnings is a valuation metric – the lower the number, the better the value. Earnings momentum is the change in annualized earnings over the past quarter. A positive number indicates earnings are increasing, the opposite is true for a negative number. This metric could also hint at potential future dividend raises or cuts. Lastly, free cash flow to enterprise value is a valuation metric. A higher number is preferred. It reflects the cash available to investors after considering all the costs related to doing business and we believe it is more difficult to manipulate compared with earnings-based measures. In our opinion, "Free cash flow is king." We've provided the average and median for all metrics to allow for better comparability.

What did we find?

Intel scores well across the board for both its safety and value metrics. Apple scores well on most metrics, but it is a little light on earnings momentum. The debt levels on IBM should be noted because they are high, on both an absolute and relative basis.

Exchange-traded funds are an option for investors who like the sector but prefer to diversify away individual security risk; iShares U.S. Technology ETF (IYW) is a U.S.-listed ETF while BMO Nasdaq 100 Equity Hedged to CAD Index ETF (ZQQ) is a Canadian-listed currency hedged ETF tracking the Nasdaq 100, a diversified technology index.

Investors should contact an investment professional or conduct further research before buying any of the securities listed here.

Sean Pugliese, CFA, is an investment portfolio manager at Wickham Investment Counsel, helping individuals, families and other investors.

Select information technology companies

CompanyTickerMarket Cap. ($Bil U.S.)Dividend yield (%)Debt/Equity (%)Price/EarningsEarnings Momentum (%)FCF/EV (%)
Apple Inc.AAPL-Q808.11.667.915.42.46.5
Alphabet Inc.GOOGL-Q687.50.02.827.30.74.3
Microsoft Corp.MSFT-Q555.52.274.321.83.85.1
Facebook Inc.FB-Q448.40.00.028.912.52.6
Alibaba Group BABA-N352.10.032.630.45.10.1
Visa Inc.V-N221.60.748.325.66.02.3
Oracle Corp.ORCL-N186.91.790.616.01.97.5
Intel Corp.INTC-Q171.83.038.212.64.47.1
Cisco Systems Inc.CSCO-Q158.13.745.013.01.310.6
IBM IBM-N142.93.9231.111.00.26.9
Mastercard Inc.MA-N133.70.791.627.14.03.2
Broadcom Ltd.AVGO-Q102.31.672.215.59.32.8
Average330.71.666.220.44.34.9
Median 204.21.658.118.93.94.7

Source: Thomson Reuters, Wickham Investment Counsel Inc.

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