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number cruncher

What are we looking for?

With the information technology sector leading the pandemic rally, my team member Allan Meyer and I thought we would see how IT companies stack up using our investment philosophy focused on safety and value. Traditionally, IT has been dominated by growth companies but some names offer investors dividends, low debt and attractive valuations, which marry well with our investment approach.

The screen

We started with U.S.-listed equities in the IT sector with a market capitalization of US$50-billion or more, sorted from largest to smallest. We view market capitalization as a safety factor; larger companies tend to be more liquid and less volatile.

Dividend yield is the annualized dividend divided by the share price. All companies on this list are expected to pay a dividend, but it should be noted that this could change given the uncertainties surrounding COVID-19.

Debt/equity – the ratio of the amount of debt a company holds compared with its equity – is a safety measure where a smaller number is better. As we like to say, it is difficult to go bankrupt when you have little or no debt.

Free cash flow to enterprise value (FCF/EV) is another valuation metric. Free cash flow 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. Enterprise value is a measure of a company’s total value. A higher number is better for FCF/EV, a metric which is one of the cornerstones of our investment philosophy.

Price/earnings is the share price divided by earnings, and 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, and vice versa for a negative number. It may also hint at future dividend raises, or cuts and share price appreciation, or depreciation.

Lastly, we included the 52-week total return to track performance and the average and median numbers for better comparability.

What did we find?

Intel Corp., Cisco Systems Inc. and Applied Materials Inc. score reasonably well across the board for safety and value. International Business Machines Corp. has the highest yield and offers an attractive valuation, but also carries high levels of debt. Oracle is the most levered (highest debt), but it scores well in other areas. Over all, many names boast positive total returns and earnings momentum during this difficult time. Some, such as Apple Inc. and Nvidia Corp. have more than doubled money for investors over the past year.

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

U.S. technology stocks

CompanyTickerMarket Cap. ($B USD)Recent Price ($ USD)Dividend yield (%)Debt/Equity (%)FCF/EV (%)Price/EarningsEarnings Momentum (%)52wk Total Rtn (%)
Apple IncAAPL-Q1817.3425.040.8119.43.428.33.1110.8
Microsoft CorpMSFT-Q1551.4205.011.061.63.231.41.651.6
Visa IncV-N405.1190.400.648.23.033.4-5.38.0
Mastercard IncMA-N308.9308.530.5144.72.639.3-6.815.1
NVIDIA CorpNVDA-Q261.1424.590.216.31.747.315.9164.2
Intel CorpINTC-Q203.047.732.837.38.110.03.10.3
Cisco Systems IncCSCO-Q198.947.103.173.58.414.90.3-8.7
Oracle CorpORCL-N170.255.451.7592.86.613.51.01.1
Accenture PLCACN-N149.2224.781.40.24.228.0-0.418.4
Qualcomm IncQCOM-Q119.2105.612.5325.15.118.21.753.0
Texas Instruments IncTXN-Q116.8127.552.865.25.023.92.37.9
International Business Machines CorpIBM-N109.5122.945.3301.88.210.5-8.0-12.5
Fidelity National Information Services IncFIS-N90.4146.311.040.82.223.8-5.613.6
Intuit IncINTU-Q79.9306.370.711.62.938.1-15.112.4
Applied Materials IncAMAT-Q59.064.331.464.75.015.45.937.3
Automatic Data Processing IncADP-Q57.1132.912.734.85.125.90.0-17.2
Lam Research CorpLRCX-Q54.7377.161.2112.63.617.77.888.2
Global Payments IncGPN-N53.2178.020.434.42.124.83.910.6
AVERAGE1.7115.84.524.70.330.8
MEDIAN1.363.13.924.41.313.0

Source: Eikon & Wickham Investment Counsel Inc.

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

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