By Harvest Portfolios Group
James Learmonth, CFA
Senior Portfolio Manager
Technology stocks have continued to rebound from their mid-winter retreat helped by record earnings and strengthening outlooks.
The strong quarterly results which have prompted dividend increases has helped the sector regain its footing as investors reassess long-term prospects beyond the effect of pandemic. The long-term energizers are still attractive and include continued growth in cloud-based internet and data storage, rapid growth in technologies including autonomous and electric vehicles, artificial intelligence, learning software and home-based work and entertainment.
In earnings reported at the end of July 2021:
- Microsoft Corp. capped a year of strong performance with a quarterly record as the pandemic boosted demand in key areas where it operates. This includes data storage, internet security and cloud services. Revenues in the three months ending June 30 were 21% higher than a year earlier at US $46.2 billion and profits rose 47% to $16.5 billion.
- Google’s parent Alphabet earned US $18.5 billion in its latest quarter. As recently as 2015, it made less than that in an entire year, reported the New York Times. The Times added that Alphabet’s growth rate is one rarely achieved by companies its size, “but the pandemic has erased all the limits for tech firms.”
- Apple Inc.’s profit almost doubled in its latest three months, showing that the world’s most valuable company is not slowing down. Net income increased 93 percent to US $21.7 billion, while sales rose 36 percent to $81.4 billion. Both exceeded analysts’ expectations.
- Texas Instruments Inc. also beat Wall Street estimates in its second quarter, helped by a 41% rise in revenue to $4.58 billion. Gains came from its analog chips and embedded processing businesses. Quarterly net income of $1.93 billion was also 40% higher than a year ago.
These companies are among the components of the Harvest Portfolios Group’s Harvest Tech Achievers Growth & Income ETF (TSX:HTA). The ETF is an equally weighted, actively managed portfolio of 20 large-cap companies that are diversified across the technology sub sectors. As of July 31, 2021, more than half of the companies are in the software (30%) and semiconductor (36%) industries. The rest are spread out among IT Services (10%), interactive media (10%), equipment and hardware (10%) and communications equipment (5%.)
The ETF is designed to provide a consistent income as well as an opportunity for growth which is enhanced by Harvest’s covered call strategy.
While investors traditionally turn to technology stocks for growth, as the sector has matured, dividends have been rising.
The rising dividend trend led Harvest to raise the ETF’s monthly distribution as of April 30, 2021. The distribution rose 20% to 7 cents a month, the first increase since the ETF was launched in 2015. The covered call strategy lifts the monthly distribution current yield to 4.99%. (as at July 30, 2021)
The companies in the ETF raising dividends in the last year include Microsoft with a 10% in December 2020. Apple increased its dividend by 7% with the May 2021 payment. Texas Instruments increased its dividend 13.3%. Oracle Corp. (16.7%) and Broadcom Inc. (13.31%) are among the other increases.
Harvest portfolio manager James Learmonth notes that of the companies in the fund increasing dividends, the average annual increase between 2019 and 2020 was 9.9%.
He also notes that the tech sector has room for more dividend growth in part because it has the lowest debt to total assets ratio across among S&P sectors The lower the ratio, the safer the company and the greater the flexibility to raise dividends.
He says the average dividend payout ratio for technology stocks is 50%, third lowest for the S&P 500. A payout ratio of 50% means 50% of profits are paid as dividends with the rest retained for investment in the businesses.