HP (HPQ) and IBM (IBM) Snapped Up in Search for Yield; Apple (AAPL) Should Focus More on Dividends - Sacconaghi

Bernstein tech analyst Toni Sacconaghi pointed out in a research report today that 2016 market performance to date has been characterized by a thirst for yield. Companies with the highest yields have outperformed stocks with the lowest yields by nearly 1,000 bps YTD. Within the US top 1500 technology stock universe, the highest-yielding quintile of dividend payors as of Dec 31, 2015 has outperformed the lowest-yielding quintile by 1,140 bps YTD. Average outperformance relative to the S&P 500 of the top 25 tech dividend payers has been 980 bps YTD.

Within the firm's tech coverage, Sacconaghi notes HP, Inc. (NYSE: HPQ) and IBM (NYSE: IBM) have outperformed year-to-date despite deteriorating fundamentals because of their high yields.

The analyst notes HPQ was the highest yielding tech stock as of Dec 31st and has outperformed by 10.3% year to date, despite very poor financial results stemming from weakness in both the PC and printing markets, and challenges in managing supplies channel inventory levels.

IBM was the 8th highest dividend yield tech stock entering the year and has outperformed by 970 bps, despite organic revenue continuing to decline at CC (for both high-margin software and the company overall) and growth of its strategic imperatives showing signs of a slowdown.

While HPQ and IBM have done well the firm's cautious that their research indicates that higher dividend paying stocks are likely to underperform in low-risk aversion environments and when rates increase. On net, they see more risk for IBM than HPQ.

Commenting on Apple (NASDAQ: AAPL), Sacconaghi believes the stock would have been much better served this year (and potentially over the long term) by having a more balanced capital return split between dividends and buybacks.

"Apple's dividend entering the year was 2.0%, similar to the S&P. In April, the company increased its capital return targets by $50B, but did so in lock-step with previous increases, which heavily favored buybacks over dividends," he commented. "We wondered at the time – and still do – whether Apple should have looked to earmark a higher percentage of its cash return in the form of dividends. Apple’s current cash return target is 70% buybacks/30% dividends – had Apple looked to return 40% of its FCF in dividends, its current dividend yield would be ~3.5% (placing Apple among the top 15 dividend yielders in tech), which we believe might help put a floor valuation under the stock."

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