|Forbes.com, Winter, 2013. This article was written with Oliver Pursche, the Co-Portfolio Manager of GMG Defense Beta Fund. It was part of a series of articles developed under an agreement with forbes.com to work with a variety of contributors and assist them in delivering actionable investment ideas each week. The site, forbes.com is one of the top 500 sites in the world with nearly 10 million subscribers and nearly 100 million page views a month.|
Technology stocks were once considered speculative because they had yet to deliver on their promise of ‘gee whiz’ improvements in the lives of the masses.
For instance, the MS-DOS operating system developed by Bill Gates and company was cool—sort of—but a major manufacturer of personal computers, such as IBM, was years away. And an application that was actually useful outside of business was still further away.
Likewise, Apple Computer went public in 1980 with the dream of making computers household products, an idea that became only viable some 21 years later with the introduction of the iPod MP3 music player.
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But I think we can all agree that technology has fulfilled its promise. There’s plenty of ‘gee wiz’ things that can be accomplished with just a laptop and Internet connection. And outside the realm of consumers, if technology isn’t the business it’s driving the business in areas ranging from energy exploration and production, to retailing to financial services and medical devices.
In short, technology is where the money is, and as a result, it’s where I am overweighting my equity allocation for the GMG Defensive Beta Fund (MPDAX). But hey, you don’t have to take my word for it.
Now, as to where the money is, look at the dividends of technology companies. According to year-end figures from Standard & Poor’s, the companies within the technology sector are paying more dividends than companies of any other sector.
In the aggregate, they account for 14.7% of all dividends paid by S&P 500 companies up from just 6% in 2007. To me, excess cash that does not need to be plowed back into R&D for product development and refinement, and instead can be paid to shareholders is the clearest sign yet that technology in general and many technology companies specifically, have finally fulfilled their promise.
Moreover, from a historical perspective, the timing seems right. Specifically, according to Standard & Poor’s (same report referenced earlier), the forward price earnings ratio of the S&P Technology sector stands at 12.2x (where x stands for times earnings), compared to a 15-year average of 23.8x.
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If you believe forward estimates are too aggressive, the trailing price earnings ratio (based on what these companies have already earned) is 14.6x, compared to a 15-year average of 26.7x.
Further, many tech companies have unassailable balance sheets. There’s Apple (AAPL), which is expected to have as much as $200 billion in cash and equivalents on its balance sheet by the end of 2013. Venerable IBM (IBM) has more than $70 billion in retained earnings and nearly $13 billion in cash on hand.
A lesser-known and smaller technology company, Cognizant Technology Solutions (CTSH), which provides IT consulting and outsourcing services, has no debt, has more than $2 billion in cash and equivalents on hand (though it does not yet pay a dividend).
Below is a list of stocks I own for the Beta Fund based on the above mentioned factors, which include stable but growing businesses, strong balance sheets and (in most cases) income.
International Business Machines (IBM)
Cognizant Technologies (CTSH)
Adobe Systems (ADBE)
Sources: Tech Dividend Data; Standard & Poor’s.