Many companies recently reduced or suspended their dividends as the novel coronavirus (COVID-19) pandemic throttled their cash flows. Those sudden moves forced investors to reevaluate the stability of their dividend stocks.
Dividend stocks in macro-sensitive sectors, including the energy, industrial, and financial markets, are vulnerable to dividend cuts as the economy grinds to a halt. The tech sector, however, contains some resilient stocks that should be able to keep paying their dividends throughout the crisis. These three stocks fit the bill: Seagate Technology (NASDAQ:STX), IBM (NYSE:IBM), and Intel (NASDAQ:INTC).
1. Seagate Technology
Seagate is the world’s largest maker of traditional platter-based hard disk drives (HDDs). Unlike its main rival, Western Digital, Seagate didn’t aggressively expand into the flash-based solid-state drive (SSD) market. Instead, it focused on selling higher-capacity HDDs to enterprise and data center customers.
The HDD market is heavily commoditized, but Seagate generates stable cash flow from a base of customers that constantly require more storage at low prices. As more people work from home, stream media, and use cloud-based services, data centers must expand their storage, which generates higher shipments for Seagate.
That’s why Seagate doesn’t expect to see a “material financial impact” from the coronavirus crisis. Instead, its revenue could rise — along with other orders from data center component providers — throughout April and the rest of the crisis.
Seagate currently pays a forward dividend yield of 5.4%. It spent 57% of its free cash flow (FCF) on that payout over the past 12 months, which should give it plenty of breathing room throughout the crisis. It also raised its dividend last year for the first time since 2015.
IBM has raised its dividend for 24 straight years and currently pays a forward yield of 6.2%. It spent just 48% of its FCF on its dividend over the past 12 months, and it expects its FCF to rise 5% in 2020, buoyed by its acquisition of Red Hat, the expansion of its cloud business, and rebounding system sales.
The coronavirus crisis could force IBM to lower those expectations, but demand for its cloud services should remain stable as more employees work online and businesses migrate their on-premise data to hybrid clouds that can be accessed remotely.
IBM’s new CEO Arvind Krishna, who previously led the higher-growth Cloud and Cognitive Software unit, could also expand Big Blue’s public cloud business to challenge Amazon and Microsoft. Those changes could offset the slower growth of IBM’s legacy IT and business software segments, and support its dividend payments throughout the crisis.
Intel is the world’s largest manufacturer of x86 CPUs for PCs and data centers. Demand for both types of chips should rise as remote workers upgrade their PCs and data centers upgrade their hardware to process the surging workloads.
Intel pays a forward yield of 2.4%, and it’s raised that dividend annually for five straight years. It spent just 33% of its FCF on that payout over the past 12 months, and it recently suspended a massive $20 billion buyback plan ($7.6 billion of which was already spent) to protect its dividend during the downturn.
Intel warned that the coronavirus crisis could “materially” impact its business, but hasn’t reduced its full-year guidance for 2% revenue growth and 3% earnings growth yet. That’s likely because Intel still isn’t sure if its recent tailwinds — including the reopening of its Chinese plants, rising PC and data center demand, and an easing chip shortage — will offset the macro headwinds and competition from AMD.
But regardless of the outcome, Intel will likely keep paying its dividend throughout the crisis, and possibly raise its payout at the end of the year.
The key takeaways
Seagate, IBM, and Intel are all partly insulated from the pandemic and should continue paying their dividends for the foreseeable future. The crisis won’t end anytime soon, but these three stocks will reward investors for staying patient as the market treads water.