SSome investors and analysts associate the tech sector with expensive speculative stocks. However, not all tech companies trade at high valuations. Certain technological actions like Light technologies (NYSE: LUMN), Qualcomm (NASDAQ: QCOM), and Verizon Communications (NYSE: VZ) not only trade at low multiples, but also use cutting edge technology to drive sales and hopefully investor earnings.
Image source: Getty Images.
Granted, Lumen has gotten cheap for a reason over the past few years. Customers cutting landlines and cable TV services have driven stocks down, leading to single-digit stock prices and lower dividends. However, the company has now reoriented its focus, offering advanced computing, cloud, infrastructure, network and security services. It also supports wireless service providers such as T Mobile, serving as the backbone of 5G networks.
Its stock has grown by over 32% in the past year, and it is relatively fair valued at just eight times earnings, well below the tech industry’s average P / E ratio of 39, according to Fidelity.
Difficulties with income may explain why Lumen is still trading at a low multiple. Revenue fell 4% in the first quarter, compared to 12 months ago, to just over $ 5 billion. In fiscal 2020, it fell 3% from last year’s levels to $ 20.7 billion.
Fortunately, free cash flow of $ 2.8 billion in 2020 and $ 809 million in the first quarter allowed it to cover quarterly dividend expenses of $ 274 million. This dividend, which pays $ 1 per share annually, yields about 7.7%, well above the average yield of the S&P 500 by 1.3%.
The company has also used its free cash flow to reduce and refinance its massive debt load. Indeed, $ 31.4 billion is a heavy debt burden for a business with $ 11.3 billion in equity (the value of the business after subtracting liabilities from assets). Nonetheless, long-term debt has declined by $ 4 billion since the first quarter of 2019.
While earnings gains remain elusive for now, the balance sheet continues to improve and investors are getting a generous cash return. If this trend continues, Lumen may not have a reason to stay this cheap any longer.
Qualcomm thrives on maintaining wireless patents that give the company an edge over smartphone chipsets. Therefore, Qualcomm receives a discount on every smartphone chipset in the world.
Certainly, companies like Taiwan-based MediaTek have become a competitive threat. However, thanks to its 5G-enabled Snapdragon 888 processors and upcoming Snapdragon 888 Plus processors, it holds a technical lead in a market that is expected to grow at a compound annual growth rate of 69% through 2028, according to Grand View Research.
This 5G upgrade cycle increased revenue for the first six months of fiscal 2021 to $ 16.2 billion, a 57% increase from the first six months of 2020. Additionally, net profit jumped 203% during that period to $ 4.2 billion. Lower increases in the cost of income and operating costs as well as positive income from investments helped to increase profits.
Qualcomm projects between $ 7.1 billion and $ 7.9 billion in revenue for the third quarter. This will lead to an increase of between 49% and 62%, if the forecasts hold true. This also equates to a considerable return considering that the stock is selling for around 20 times the profits.
Plus, the $ 5.1 billion in free cash flow in the first six months easily covered $ 1.5 billion in dividend costs. This annual payment of $ 2.72 per share produces a cash return of 1.9%. Since the stock price has risen nearly 60% in the past 12 months, the 5G upgrade cycle and low multiple make Qualcomm’s value proposition hard to match.
LUMN data by YCharts
Value-driven investors may also be interested in a telecom provider like Verizon, which is engaged in a battle with T-Mobile and AT&T to provide 5G services. In January, for the 26th consecutive time, Verizon won the title of JD Power’s most awarded brand for network quality. To meet consumer quality expectations, Verizon invested $ 45 billion in C-band spectrum during the first quarter of this year. Spectrum equates to real estate for wireless frequencies, which buys the usage rights from Verizon. So, he can use this “property” to improve the quality of his 5G service.
Additionally, 5G appears poised to make Verizon a Network as a Service (NaaS) provider, which is not possible with 4G technology. This provides network infrastructure services as a subscription-based model for activating and connecting applications. This will power, among other things, artificial intelligence (AI), virtual reality (VR) and Internet of things (IoT) applications. In its call for first quarter 2021 results, Verizon cited Hondaself-driving cars and immersive learning at Arizona State University as examples of activities this service supports.
Verizon’s stock price / earnings (P / E) ratio of 12 reflects the company’s recent struggles. In 2020, revenue was down 3% from 2019 levels. This happened mainly because service revenue declined only slightly, while wireless equipment revenue plunged by. 15% during this period in a context of declining activity during the pandemic. That appears to have changed in the first quarter of 2021, with wireless equipment revenue rising 20% from last year’s levels. Nonetheless, with the 4% increase in overall income year over year during this period, investors may have little incentive to increase the earnings multiple.
Nonetheless, Verizon is paying investors well to wait for a recovery. Its annual dividend of $ 2.51 per share generates a cash return of 4.5%, making it one of Warren Buffett’s highest paying dividend stocks. In 2020, $ 23.6 billion in free cash flow helped manage the $ 10.2 billion in dividend spending, even with $ 18.2 billion in capital spending. The company has increased its dividend every year since 2007, increasing the likelihood of a dividend hike in 2021.
Such a payment coupled with booming NaaS business may give patient investors good reason to try their luck on Verizon.
10 stocks we prefer over Verizon Communications
When our award-winning team of analysts have stock advice, it can pay off to listen. After all, the newsletter they’ve been running for over a decade, Motley Fool Equity Advisor, has tripled the market. *
They just revealed what they think are the ten best stocks investors can buy right now … and Verizon Communications was not one of them! That’s right – they think these 10 stocks are even better buys.
See the 10 actions
* The portfolio advisor returns on June 7, 2021
Will Healy has no position in the stocks mentioned. The Motley Fool owns shares and recommends Qualcomm. The Motley Fool recommends T-Mobile US and Verizon Communications. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.