Where Are These 3 Tech Stocks in Dow's Rally?

Joseph is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Many of the fallen angels from the dot-com bubble seem to be called "dead money" left and right, especially the trio consisting of Cisco Systems (NASDAQ: CSCO), Intel (NASDAQ:INTC), and Microsoft (NASDAQ: MSFT).

Cisco was the latest firm to catch a downgrade, cratering nearly 4%. Unfavorable future prospects in the rapidly evolving tech sector seem to be one of the main causes for concern. But is the bad rap deserved?

Terrible performance?

The chart below helps paint the picture as to why these tech plays are often called dead money. A common complaint goes something like this: "I bought so-and-so at this price ten years ago, and it's still sitting at the same price!" These stocks seem to have lagged the market forever, so maybe these concerned investors have a point:

Looking at price performance over a 10-year period, the persistent lagging of the broader market leaves a bitter taste in many investors' mouths. But what about valuations? How about fundamentals? Are these companies headed down the drain?

The decade of P/E compression...

It's clear these stocks also become much cheaper when considering their price relative to earnings. But does this really mean anything? Is the market anticipating a downfall into the depths of oblivion with the likes of the Eastman Kodaks of the world? 

Future prospects may be a little brighter...

	P/E	EPS (ttm)	Forward P/E
CSCO	12	$1.74	9.9
INTC	10.3	$2.13	10.5
MSFT	15.7	$1.82	9.14

Data from Yahoo Finance March 28

Indeed, the future may be a little brighter, at least for Cisco and Microsoft, which are expected to increase earnings, giving them both a low P/E going forward.

If they indeed meet annual EPS estimates, which are $1.99 and $2.84 for Cisco and Microsoft, respectively, and are assigned the same multiples on earnings as today, capital appreciation should come. Intel plans to spend a ton of money on capex this year, which may be a drag in the near-term, but may also result in a big payoff for long-term shareholders. 

Future dividend kings?

One oft left-out fact about the whole "dead money" thing, besides the fact that P/Es are being compressed, which makes these stocks much cheaper than before, is the increasing dividend payouts. It's all about the dividends: Cisco, Intel, and Microsoft have not only begun to pay out high-yielding dividends, but have also managed to increase their distributions at a rapid clip as well:

Cisco just announced another 21% increase to its dividend as well, now paying out $0.17 quarterly-- which lifts the stock's yield well over 3%. Microsoft yields around 3.3% also, with Intel leading the pack with a yield at around 4.2%.

Reinvesting these dividends lets compounding takeover while simultaneously providing an increasing source of wealth, all of which is coming from what at first appears to be a useless, "sideways" stock. The dividends will make you money, but how safe are these precious dividends?

By Joseph Harry 

Financial strength is a common trait...

All three of these "big tech" companies are strong financially. Microsoft is one of the only companies left in the whole market with a 'AAA' credit rating.

	Total Cash (mrq)	Total Debt (mrq)	Current ratio (mrq)	Total Debt/Equity (mrq)
CSCO	$46.4 billion	$16.3 billion	3.4	29.3
INTC	$18.2 billion	$13.6 billion	2.4	26.5
MSFT	$68.1 billion	$14.2 billion	2.8	19.6

Data from Yahoo Finance March 28 (MRQ=most recent quarter)

All three companies are fairly liquid and keep their debt in check, all while keeping a sizable cash horde on-hand. They also tend to generate lots of free cash flow:

One thing investors should consider is where these companies keep their cash hordes -- as well how they spend it. 

A significant chunk of Microsoft's cash horde is trapped overseas. So is a good amount of Cisco's stash. Cisco has also been purchasing foreign firms with its cash, as well. This could definitely become a huge negative for shareholders, as cash trapped overseas may not be returned right away and may even be used on costly acquisitions. Acquisitions can be great, but they can also be bad. If they are bad, then money that could have been given back to shareholders was wasted.

The bottom line

As the Dow has run up and touched record nominal highs, Cisco, Intel, and Microsoft have sat from the sidelines and watched. They seem to have lagged for the past decade. There is hope, however.

Earnings are expected to stay relatively stable for Intel, but increase for Cisco and Microsoft. This should help shares of Cisco and Microsoft -- if the companies meet expectations and are assigned P/E ratios equal to where the stocks are currently trading. They make good value plays at today's levels.

Another aspect differing from a decade ago revolves around dividends. These companies are fairly new to the dividend game, but have been on a tear. The "dead money" argument is getting played out with every dividend increase.

Dividend increases are nice, but they are even better when they come from companies with strong balance sheets that constantly generate significant free cash flows, as well. Welcome to a new class of dividend growth stocks. Safe, increasing dividends from relatively low payout ratios are what these stocks are all about. Especially when all three of the aforementioned companies carry yields well over 3% -- making them more than capable of generating continuous income. What's wrong with that? 

More Expert Advice from The Motley Fool

Once a high-flying tech darling, Cisco is now on the radar of value-oriented dividend lovers. Get the low down on the routing juggernaut in The Motley Fool's premium report. Our report also has you covered with a full year of free analyst updates to keep you informed as its story changes, so click here now to read more.

Joseph Harry owns shares of Microsoft and Cisco Systems. The Motley Fool recommends Cisco Systems and Intel. The Motley Fool owns shares of Intel and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insightsmakes us better investors. The Motley Fool has a disclosure policy. Is this post wrong?Click here. Think you can do better? Join us and write your own!

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