3 Great Tech Blue Chip Buys

(Source: imgflip)

There's nothing quite like high flying tech stocks to get investor blood flowing and boost portfolio returns. Over the last decade, the tech-dominated Nasdaq has handily outperformed the S&P 500 and Dow Jones Industrial Average.

  • Nasdaq 10 year return: 322%
  • S&P 10 year return: 207%
  • DJIA 10 year return: 198%

(Source: Ycharts)

And over the longer-term as well tech stocks have proven themselves to be exceptional wealth compounders.

Of course, the downside to such long periods of outperformance is valuations on many of the most popular tech stocks, including dividend payers, have gotten stretched.

But fortunately, recent trade war fears have caused many tech stocks to sell off, including three blue-chip dividend growth names that I consider potentially excellent long-term buys today.

These would be Intel (INTC), Skyworks Solutions (SWKS), and Expedia (EXPE), all of which I've been considering for addition to my retirement portfolio (where I keep 100% of my life savings).

So let's take a look at just why Wall Street is currently down on these three tech blue-chips, why those fears are likely overblown, and why these three former Wall Street darlings are now so attractively priced they are likely to deliver not just safe and growing dividends over time, but double-digit and market-beating returns in the coming years.

Why The Market Hates Intel

Intel recently cut its 2019 guidance by $2.5 billion meaning it expects revenue to decline 3% this year due to losing market share in PC and X86 server chips to Advanced Micro Devices (AMD). That's partially due to a multi-year delay in launching its 10nm PC and server chips, which rivals like AMD have taken advantage of by releasing 7nm chips (smaller chips are both faster and more energy efficient).

Not only does this imply Intel is losing market share to a smaller but apparently more nimble rival, but its historical cash cow, PCs, is in secular decline. Analyst firm Research And Markets expects global PC sales (where Intel has historically enjoyed 80+% market share, including 85% today according to Mercury research) to drop from 325 million in 2017 to 308 million four years from now.

What's more, major tech giants like Facebook (FB), Alphabet (GOOG) and now Amazon (AMZN) which have been a huge growth driver for the company's data center chip business, have announced plans to develop their own AI chips in-house, to help drive their advanced data center needs.

And as if all that wasn't bad enough, the company recently concluded its CEO search by naming Bob Swan (interim CEO since June 2018) as its permanent CEO. Mr. Swan, the former CFO of eBay (EBAY) and Intel itself under its former CEO, is one of the few non-engineer CEOs in the semiconductor industry. Thus Wall Street may be skeptical of his abilities to adapt to the rapid pace of change the company faces.

But those risks are hardly the cause of the stock's horrible recent plunge.

(Source: Ycharts)

In May Intel, the world's largest chip maker plunged almost twice as much as the Nasdaq. That was largely over trade war concerns.

According to UBS and Lipper Financial, Intel is the 10th most China trade war sensitive company, with the top 24 names on the list dominated by tech stocks, particularly semiconductor firms. This is due to the deeply integrated supply chains which result in a high percentage of revenue coming from China (at least as far as tariffs would be concerned).

(Sources: UBS, Lipper Financial)

So with Intel facing so many potential short and medium-term headwinds, which have cratered the stock, why am I recommending it and considering adding it to my retirement portfolio?

And Why I Consider It A Potentially Great Buy Right Now

  • Dividend Safety Score: 5/5
  • Business Model: 2/3
  • Management Quality: 2/3
  • Total Quality Score: 9/11 (SWAN)

I am only interested in high-quality dividend stocks, meaning 8 or higher on my 11 point quality score which is heavily focused on dividend safety. After all, the glorious thing about dividend growth investing is you get paid exponentially more to own a company and let management work hard for you, so you don't have to (the essence of passive income investing).

Company Yield TTM FCF Payout Ratio Simply Safe Dividends Safety Score (Out of 100) Sensei Dividend Safety Score (Out of 5) Sensei Quality Score (Out of 11)
Intel 2.7% 44% 95 (Very safe) 5 (Very safe) 9 (SWAN)
Safe Level (by industry) NA 50% or less 61 or higher 4 or higher 8 or higher

(Sources: Simply Safe Dividends)

Unquestionably Intel offers a very safe dividend, courtesy of its modest FCF payout ratio, as well as a very strong balance sheet.

Company Net Debt/EBITDA Interest Coverage Ratio S&P Credit Rating Average Interest Cost TTM Return On Invested Capital
Intel 0.6 30.3 A+ 2.0% 22%
Safe Level 1.5 or below 8 or above BBB- or higher below ROIC 12% or higher

(Sources: Simply Safe Dividends, F.A.S.T Graphs, Gurufocus, Morningstar)

The company's net leverage ratio is super low, even by the standards of chip makers, and its interest coverage ratio is sky-high. Thus it's not surprising that it enjoys an A+ credit rating, which when combined with overseas borrowing (where rates are near zero) means borrowing costs of just 2%. For context the US Treasury borrows at an average interest rate of 2.6%. That's 11 times below its returns on invested capital, which are both a proxy for quality management and a source of organic earnings and cash flow growth.

(Source: Simply Safe Dividends)

While Intel may not be a dividend achiever, due to several years of frozen payouts, in 21 years of paying a dividend it's never been cut and the company has a generally impressive track record of steady growth over time.

For most of its life since its 1968 founding, Intel was known for its computer centered microprocessors. However, the company has worked hard to diversify into faster-growing markets, including flash memory, and chips used in data centers and advanced technology such as driverless cars and other IOT industries. In 2018 47% of its sales were from this future tech segment which saw revenue growth of 21% last year, driven mostly by data center chips.

(Source: investor presentation)

That's a big increase from the 70% cash flow concentration the company's PC focused businesses delivered in 2013 and in the coming years Intel expects that data center focused units will grow to represent 70% of cash flow.

(Source: investor presentation)

That's because Intel's focus is on the future, where data centers and the internet of things, plus the 5G transition are expected to drive 7% growth in data-centric's addressable market share.

(Source: investor presentation)

That market size growth is expected to be powered by the rise of 5G which will enable up to 100 times faster downloads, and thus drive 20% to 35% CAGR growth in overall data usage (depending on industry).

That means that by 2023, Intel estimates its most profitable and fastest growing business lines will represent an addressable market that's more than triple the size of the gradually declining PC and server market. And in AI chips, (43% market share in 2018), Intel expects the market size to grow over 20% CAGR through 2023, increasing 150% to $10 billion over the next five years.

Better yet, this faster-growing part of its business is also more profitable, resulting in most of its profits (53%) already coming from the thriving data-centric business segment.

Intel's big competitive advantage is size and access to a mountain of low-cost capital, both low-cost borrowing, and its own retained free cash flow ($8.8 billion in 2018). This allows it to invest in state of the art chip-making plants (which can take several years and $5 to $8 billion to construct), as well as make acquisitions both big and small.

For example, in 2015 it paid $16.7 billion for Altera (which ultimately gave it its booming data center chip business) and then in 2017, it bought Mobileye for $15.3 billion. Mobileye is a leader in driverless car tech that Intel estimates will represent a $100 billion addressable market for its chips by 2030.

(Source: investor presentation)

Mobileye's driverless car tech is now in over 24 million cars worldwide its sales growth remains over 40% annually. That's courtesy of signing up over 70 global automakers in the last three years to use its platform.

(Source: Investor presentation)

But the vast majority of the company's recent M&A activity is focused on smaller tuck-in acquisitions to boost its data analytics/software security applications. That's a good thing since the Harvard Business Review estimates that about 80% of large-scale M&A fails to deliver shareholder value.

And while its PC and X86 server chips may not be a source of significant future growth they remain high margin cash cows for now. Intel (and analysts) are confident that EUV lithography tech will allow it to succeed in delivering its 7nm chips with far less difficulty than its 10nm ones, by 2021.

Management is confident that its long-term plans will deliver about 5.4% CAGR revenue growth between 2019 and 2023 ($69 billion to $85 billion). The company plans to increase margins by cutting capex as a percentage of revenue from 36% in 2015 to 25% by 2021.

(Source: investor presentation)

The company has actually been able to deliver such efficiency savings over the past few years, while not sacrificing where it counts (R&D). That's what's allowed its businesses to thrive, delivering impressive sales growth.

(Source: investor presentation)

Over the next five years, Intel expects that 5.4% sales growth to translate into 5.6% to 7% EPS growth, and FCF/share growth slightly above that due to higher FCF/earnings conversion rates. Buybacks at low prices could help the company exceed those modest expectations.

Intel has repurchased 4.7% of its shares over the past year, taking advantage of its weak stock price. It has another $14.9 billion left under its current authorization which could potentially buyback about 7.5% of outstanding shares at current prices. Aggressive buybacks during a period of share price weakness is a major advantage companies with strong free cash flow and A rated balance sheets enjoy.

(Source: Ycharts)

Over the past three decades, Intel has delivered about 15.5% CAGR total returns, crushing both the Nasdaq and S&P 500. And given the super low PE right now, it may be able to deliver similar or even better returns over the next five to ten years.

(Source: F.A.S.T Graphs)

Analysts currently expect management to exceed its roughly 6.5% growth guidance, with Factset Research reporting the analyst consensus at 10% EPS growth over the next five years.

Historically Intel trades at 19.1 times earnings, but today just 10.5. Even assuming a more conservative 15.0 PE by the end of 2024, that still delivers over 20% annualized total returns. For context private equity and venture capital funds strive to achieve 20% CAGR returns, due to the high-risk and illiquid nature of their investing strategies.

Intel offers conservative income investors the potential for private equity/venture capital returns, but in a low-risk, and perfectly liquid dividend growth blue-chip. That's the power of opportunistic, deep value blue-chip investing.

But even if you take management at its word and assume much more modest growth estimates, then as I show in the valuation/total return section, Intel still makes for an attractive dividend growth stock from today's valuations.

Why The Market Is Bearish On Skyworks

Skyworks is primarily a maker of radio frequency chips for smartphones with just over 70% of revenue derived from smartphone chips. With 4G based handsets now appearing to be saturated, global smartphone sales have stalled. No significant increase in handsets is expected until 5G rolls out, which is still a few years away.

Wall Street is notorious for its 12-month price target and next quarter's focus, and so naturally this medium-term secular trend would be expected to create negative sentiment for the stock.

Global Smartphone Sales

(Source: Statista)

And as far as US/China trade war sensitive companies go, according to UBS's research, Skyworks is the most at risk with 80% of revenue coming from the middle kingdom (it was also the most exposed to a Mexican trade war with 39% of assets in Mexico according to Goldman Sachs).

Huawei made up 12% of the company's sales in the first half of fiscal 2019. According to a recent report in the Nikkei Asian review, Huawei is expected to cut its phone shipments in the second half of this year about 25%.

Due to the current inclusion of Huawei on America's Entity list, the company had to recently issue a downward revision in guidance, which the short-term focused market absolutely hates. Here are the specific revisions to fiscal Q3 guidance.

  • revenue of $765 million (7% lower than previously expected)
  • EPS of $1.34 (11% lower than previously expected)

The market's doomsday fears include the trade war lasting long enough to potentially bankrupt Huawei which would mean that the temporary 12% hit to revenue would become permanent.

(Source: Motley Fool)

And the Huawei ban came after the company was already suffering a weak first half to fiscal 2019, and is now almost certain to face a double-digit decline in revenue and adjusted earnings.

What's more, about 40% of 2018 sales came from Apple (AAPL) a company that has also been rocked by trade war fears and a lot of uncertainty (including an estimated 30% decline in phone shipments in Q1). In essence, when it comes to short-term risk, Skyworks is one of the most at risk of short-term market volatility, driven by hyper-bearish sentiment and wild speculation about the potential death of a major client (Huawei).

(Source: Ycharts)

Which is why Skyworks was one of the most hammered stocks in May's decline, itself the second worst May for the market since the 1960s.

However, as long-time readers know I consider myself a time arbitrageur, meaning I buy what the market hates today, over fears for a rough tomorrow, because my focus is always on the long-term future. And I still believe Skyworks has an excellent long-term growth runway that should result in great dividend growth and strong capital gains in the coming years and decades.

And Why I Recently Bought It For My Retirement Portfolio

  • Dividend Safety Score: 4/5
  • Business Model: 2/3
  • Management Quality: 2/3
  • Total Quality Score: 9/11 (Blue-Chip)

(Source: Ycharts)

Chipmakers are usually some of the most volatile tech stocks, which is itself generally a high beta sector. And Skyworks, over time, has averaged a beta (volatility relative to S&P 500) of about 1.8, making it one of the most volatile blue-chips you can own.

(Source: Ycharts)

It's a proven market smasher, BUT that outperformance comes at the expense of gut-wrenching volatility, courtesy of the cyclical and economically sensitive nature of its business model.

That includes the April 2018 15% crash, when the stock plummeted on news of the US ZTE parts ban which threatened to bankrupt that phone maker (President Trump eventually intervened as part of trade negotiations and saved that Chinese company).

Of course, the same volatility that scares off less risk tolerant investors also creates precisely the opportunity for large profits for those who don't mind "being greedy when others are fearful" and buying quality companies like this at March 2009 style valuations.

I recently bought an opening position in Skyworks at $70.89 (10.7X forward EPS vs 10.3 S&P 500 PE in March 2009). I moved up my weekly stock buy to Monday after positive China trade news broke and the US/Mexican trade war was called off. While I'm not a market timer, it seems logical that a company as undervalued as Skyworks could rapidly soar given even modest improvement in its short-term risk profile.

But personally, I make my investing decisions based on the long-term dividend risk profile, which accounts for 45% of my 11 point quality score (what determines blue-chip and SWAN status of my watchlist companies).

Company Yield TTM FCF Payout Ratio Simply Safe Dividends Safety Score (Out of 100) Sensei Dividend Safety Score (Out of 5) Sensei Quality Score (Out of 11)
Skyworks Solutions 2.1% 39% 71 (safe) 4 (safe) 8 (Blue-Chip)
Safe Level (by industry) NA 50% or less 61 or higher 4 or higher 8 or higher

(Sources: Simply Safe Dividends)

Skyworks offers a safe dividend, that's slightly above the market's average yield. That's both courtesy of a low FCF payout ratio, but also one of the strongest balance sheets on Wall Street.

Company Net Debt/EBITDA Interest Coverage Ratio S&P Credit Rating Average Interest Cost TTM Return On Invested Capital
Skyworks Solutions 0.0 (no debt) NA (no debt) NR NA (no debt) 29%
Safe Level 1.5 or below 8 or above BBB- or higher below ROIC 12% or higher

(Sources: Simply Safe Dividends, F.A.S.T Graphs, Gurufocus, Morningstar)

Few companies have net cash positive balance sheets (more cash than debt) and even fewer have no debt at all. Skyworks is one of those companies and also sports $957 million in cash to support the dividend, opportunistic buybacks, and to reinvest in the company including $417 million in R&D over the past 12 months (11% of revenue). Smart and focused R&D spending is why the company has 2,600 patents on its portfolio of 2,500 analog chips.

(Source: Simply Safe Dividends)

And while Skyworks' dividend track record may be short (why it's not a 5/5 safety score), it shows impressive growth of that safe payout.

What about the market worry that Skyworks' high revenue concentration in troubled phone makers like Apple and Huawei could doom it? While the risk of that isn't zero, I consider it a low probability event, and I'm not the only one. Here's Morningstar's take on the company's short and long-term prospects.

We continue to value Skyworks as if trade tensions between the U.S. and China will be resolved at some point, in turn positioning Skyworks for a bounce back in chip sales if and when demand returns from Huawei. We remain skeptical that Huawei can build smartphones without relying on RF parts from Skyworks and its U.S. based peers once this inventory buildup runs out...Although trade tensions continue to linger and the near-term picture might be bleak for Skyworks and other chipmakers, we are not anticipating a structural destruction in demand for Skyworks' RF chips as they remain key components in many wireless devices and perhaps more so in the future as 5G networks come online...Skyworks still appears fundamentally undervalued to us and represents one of our Best Ideas within the Tech sector, albeit with near-term volatility associated with trade issues. " - Morningstar's Brian Colello (emphasis added)

Remember that the key to doing well in chip makers is to buy when they are most undervalued, i.e. when the market is most fearful about short-term results. Skyworks' bullish thesis isn't based on a strong 2019 or 2020 but on great sales, earnings and cash flow growth in 2021 and beyond, courtesy of the 5G transition (that will make possible the Internet of Things or IOT). 4G phones are using an increasing number of frequencies, and 5G chips are expected to be even more complex, creating big opportunities for chip makers with strong expertise in quality RF chips that switch, amplify and filter wireless signals.

According to Mordor Intelligence, 5G chips are expected to grow 75% CAGR in the coming years. And according to management Skyworks expects to earn 40% more per 5G phone than it does for 4G ones ($25 vs $18).

(Source: investor presentation)

Over the years Skyworks has been able to pack ever more of its components into telecom equipment, meaning steadily higher monetization with each new generation of smartphone tech. That trend is expected to continue with 5G and 6G after that (the Fin's are already planning for that). 6G is expected to offer about 100 Gbps download speeds (roughly 800 times faster than 4G) with even lower latency than 5G and start rolling out commercially in the late 2020s.

(Source: investor presentation)

Skyworks' goal is to continue integrating various chip parts, so it can provide global leaders in technology with every standard they set, from LTE to WiFi, to Bluetooth.

And small cell 5G solutions are expected to grow from a $12.5 billion annual market to $58 billion by 2024, providing the company with a great opportunity to diversify away from handsets.

Then there are IOT chips, which management plans to cash in on (75 billion connected devices by 2025). IOT opportunities include driverless cars, which are expected to grow to 60 million sales per year by 2030.

(Source: Ptolemus Consulting Group)

Skyworks is already working with most leading automakers on 5G chips that will enable autonomous cars, which by 2020 alone management expects will represent a $17.5 billion annual addressable market.

(Source: investor presentation)

And driverless cars are just the most headline-grabbing use of the IOT. As Morningstar's Brian Colello explains, Skyworks' decades of R&D give it the potential to become a "leading RF supplier into a wider array of other industries, such as industrial, medical, and networking and wireless infrastructure equipment."

Does that mean Skyworks is going to dominate the future of chips? No, plenty of large rivals such as Broadcom (NASDAQ:AVGO), another chip maker I plan to buy eventually, are also working on competing solutions. But Skyworks thesis isn't about become the sole winner in 5G chips, just one industry leader among several.

Basically, Skyworks is hard at work focused on increasing its growth catalysts beyond mere smartphones, and the company's growth runway appears both large and long.

M&A is a final way to accelerate its diversification and the company has a good track record on that front. In 2011 it acquired SiGe Semi for $210 million, and Advanced Analogic Tech for $263 million. Both purchases helped to broaden its product portfolio, which has helped drive its impressive growth over the years.

(Source: investor presentation)

And let's not forget the benefit of a pristine balance sheet loaded with almost $1 billion in cash. The company can and often does take advantage of its sky-high volatility to make opportunistic share repurchases, including $142 million in fiscal Q2 buybacks that reduced the share count 5% over the past year.

(Source: Simply Safe Dividends)

Over the past 3.25 years, the company has been reducing its share count at 2.6% CAGR and the current share price is allowing it to double that rate. Every share repurchased below intrinsic value benefits existing investors and helps grow FCF/share faster, allowing the company to maintain its short but impressive track record of rapid dividend growth.

(Source: investor presentation)

Management's long-term goal is to outgrow its overall industry (gain market share) and use ever greater economies of scale to boost operating margins to 40% (up from 32% in 2018). FCF margins, which ultimately funds the dividend, are eventually expected to triple to 30%, which would mean fantastic long-term payout growth potential. That's because management expects to return about 67% of free cash flow over time via dividends and buybacks.

Even if Skyworks doesn't achieve those ambitious profitability targets (Morningstar expects peak operating margins of just 38%) the company is still likely to grow FCF/share at close to double-digits.

(Source: F.A.S.T Graphs)

According to Factset Research, analysts expect the company to deliver 9.5% CAGR EPS and FCF/share growth over the next five years, even with all the trade war (and potential recession) headwinds. If the PE ratio were to rise to Chuck Carnevale's 15.0 rule of thumb (far below the SWKS's 20.4 historical PE) then investors could see 20.5% CAGR total returns in the coming five years.

Basically, Skyworks is a leading RF chip maker whose long-term thesis is based on 5G and the IOT, not 2019 or 2020 results. Those are likely to be negatively impacted by the US/China trade war which will eventually end and thus doesn't represent a thesis breaking event.

The fortress-like balance sheet (nearly $1 billion in cash with no debt) not just makes for a safe dividend, but also allows the company to repurchase significant amounts of deeply undervalued stock, as it's been doing.

In essence, I see little reason to believe this company's long-term dividend growth thesis is broken and thus the recent crash likely represents an excellent buying opportunity for volatility tolerant income investors.

Why The Market Hates Expedia

(Source: Ycharts)

Unlike chipmakers, who are staring down the barrel of direct US/China trade disruption, Expedia merely had a very bad May, rather than a horrendous one. But it still declined by nearly 10%. That's due to secular macroeconomic fears as well as some concerns over its business model.

One long-term risk the market may be worried about is disruption by the likes of Airbnb, which is a threat to its VRBO (formerly HomeAway) vacation home rental business. In Q1 VRBO (which makes up 10% of the company's revenue) reported 5% gross bookings growth and 14% revenue growth.

Wall Street was disappointed, however, with Susquehanna analyst Shyam Patil believing that Airbnb is winning market share and thus downgraded the stock. I'm not nearly as concerned given that the slowdown in the growth of vacation home bookings was due to an advertising shift away from some of the company's alternative home booking sites towards VRBO, which management said temporarily hurt SEO (search engine optimization) results. The company remains confident its more streamlined approach is the right call for stronger future growth. That's because management wants to launch the new streamlined VRBO site internationally, which is what it's been working towards over the last few months.

Besides, Expedia's most recent results, which got Wall Street all riled up, actually showed good growth of 7% in revenue, 9% in gross bookings and adjusted EBITDA that rose 42% YOY. And for the full year, the company expects adjusted EBITDA to grow 10% to 15%, which is in-line with long-term analyst growth estimates. 12.5% adjusted EBITDA growth is also very good considering the increased growth spending this year.

There is also disruption risk from the likes of Amazon (AMZN) which recently announced it would start selling discounted plane tickets in India. While Amazon has given no indication that it is considering directly competing with Expedia's online travel agency business model, the market can be highly irrational in the short-term and whenever Bezos announces he's entering a new industry shares of major industry players often take a tumble.

It's important to remember that Amazon has tried its hand at travel before, including limited hotel bookings in 2014 (an actual competitor to Expedia). That venture failed and was shut down in 2015.

A more plausible threat to Expedia is rate parity regulation, which prevents hotels from offering rooms cheaper on their own websites than on sites like Expedia's. Such regulations benefit Expedia and might eventually be removed in the US as they have been in Europe (where Expedia is still growing steadily). However, it's important to remember that as a dominant player in this space, Expedia might actually benefit, since it has far more scale to undercut weaker rivals on price. In other words, any significant negative impact to its business model would bankrupt smaller peers and allow Expedia to potentially consolidate the industry and actually gain market share.

But one risk the market is worried about is rational, the rising threat of recession. Travel is a luxury and during economic downturns travel sites like Expedia suffer. During the Great Recession

  • sales fell 9%
  • EPS rose 10%
  • FCF/share (the real bottom line and what funds the dividend) fell 9%

The trade war escalating in May caused many to worry that a recession might be coming soon. That's not a crazy fear given that many leading economists and analysts are warning about the highest recession risk in a decade.

For example, Morgan Stanley put the US on "recession watch" in late May, citing April economic data that it says indicates that even before China tariffs were raised on May 10th, the US was at high risk of a recession in 2020.

Similarly, the Cleveland Fed (which the New York Fed's model agrees with) estimates that the average 12-month recession risk in May was about 35%. That's the highest level in 10 years, and at a level that is consistent with a recession potentially beginning by mid-2020.

However, while there are certainly real risks to worry about with Expedia (like all companies) ultimately that's why you want to buy undervalued companies, with high margins of safety (and safe dividends) that have the financial fortitude to ride out such inevitable downturns and come out the other side stronger than ever.

And Why You Might Want To Buy It

  • Dividend Safety Score: 5/5
  • Business Model: 2/3
  • Management Quality: 2/3
  • Total Quality Score: 9/11 (SWAN)

Again, my analysis of any company begins with the dividend safety, because I'm only interested in buying or recommending companies who are likely to maintain or even continue growing their payouts throughout a full economic cycle.

Company Yield TTM FCF Payout Ratio Simply Safe Dividends Safety Score (Out of 100) Sensei Dividend Safety Score (Out of 5) Sensei Quality Score (Out of 11)
Expedia 1.1% 13% 79 (safe) 5 (Very safe) 9 (SWAN)
Safe Level (by industry) NA 40% or less 61 or higher 4 or higher 8 or higher

(Sources: Simply Safe Dividends)

I consider Expedia's dividend very safe, courtesy of an extremely low FCF payout ratio and a great balance sheet.

Company Net Debt/EBITDA Interest Coverage Ratio S&P Credit Rating Average Interest Cost TTM Return On Invested Capital
Expedia 0.7 8.8 BBB 4.4% 8%
Safe Level 3 or below 10 or above BBB- or higher below ROIC 8% or higher

(Sources: Simply Safe Dividends, F.A.S.T Graphs, Gurufocus, Morningstar)

The company's net leverage ratio is very low and its operating cash flow covers its interest costs nicely. It also enjoys a good BBB rated investment grade credit rating allowing it to borrow at about half its returns on invested capital.

(Source: Ycharts)

But like Intel and Skyworks, this tech stock, while a proven market beater over time, can be highly volatile, especially when market volatility rises due to macroeconomic concerns. This is where it's important to take a long-term view and remember that how a company does this year or the next is far less important than its long-term earnings, cash flow, and dividend growth potential.

(Source: Simply Safe Dividends)

As you can see Expedia is another young dividend-paying tech stock. The apparent 2012 dividend cut was actually the result of a reverse split, related to the spin-off of Tripadvisor (TRIP). That "cut" is actually the reason Simply Safe Dividends (where I'm an analyst) rates the stock safe (above average safety compared to the average US corporation) rather than very safe. Given that the company isn't likely to make large scale spinoffs in the future, I consider the current fundamentals supportive of a very safe dividend score.

However, I will admit that the TRIP spinoff was a questionable call by management, and would have preferred they not make such a move so soon after initiating a dividend. Furthermore, it seems a bit questionable that Expedia spun off the largest metasearch platform at the time, just to buy a smaller and less impressive one (acquiring the majority of Trivago in 2012 for $632 million). That's one of the reasons I don't rate the company higher on management quality. That being said most of management's capital allocation decisions have been far more satisfactory. That includes acquiring Travelocity, Wotif Group, Orbitz Worldwide (Orbitz, CheapTickets, and ebookers) and HomeAway (now VRBO) since 2015 and Egencia in 2016.

Expedia is led by CEO Mark Okerstrom, who has been in the top job two years but is a 13 year veteran of the company. He's helped to build Expedia (as vice president of corporate development and CFO) into one of the largest online travel sites in the world, with 5.9% of global market share in 2018, which analysts expect to rise to about 7.7% within five years. In terms of online travel sites Expedia and Booking Holdings (BKNG, formerly Priceline), both command about 35% market share.

6% global market share might not sound like much but keep in mind that, according to Oxford Economics, the global travel industry is about $2.4 trillion in size (3% of the global economy) making it the 7th largest industry on earth.

(Source: Oxford Economics)

It also happens to be the second fast growing behind banking, meaning that Expedia has a lot of growth runway ahead of it courtesy of steadily gaining market share in such a highly fragmented industry.

(Source: Oxford Economics)

Expedia's massive industry lead is due to steadily building up a collection of 19 online travel sites including

  • Expedia (in over 30 countries)
  • Hotels.com (90 localized websites in 41 languages)
  • Hotwire
  • Travelocity
  • VRBO
  • Orbitz
  • Trivago (a leading metasearch platform in 55 countries, but especially popular in Europe, that connects to over 400 travel sites comparing pricing at more than 3 million hotel rooms and rentable homes)
  • Egencia (full-service corporate travel site serving over 60 countries in North America, Europe and Asia)

Expedia actually has the world's largest collection of rentable homes (1.8 million, 1.1 million on its core Expedia platform) located in over 200 countries and territories. Its sites also offer over 500 airlines, packages, rental cars, cruises, insurance, as well as destination services and activities for vacationers to enjoy. Expedia has been aggressive in shifting with the growth of mobile, and in 2018 1/3 of their bookings are done though mobile apps. Its core Expedia mobile app is among the #10 travel apps in 21 countries around the world, according to App Annie.

Expedia's main competitive advantage, and what it plans to use to compete with Booking and metasearch sites like Kayak.com, Tripadvisor, Skyscanner and Qunar (subsidiaries of Chinese rival Ctrip) is leveraging its strong network effects and massive financial advantage.

The network effect Expedia enjoys is the fact that it has collected so many top tier travel locations, airlines, hotels, cruise lines, on its platform, in nearly every country on earth. Rivals, of which there are hundreds, are smaller and lack the connections or deep pockets to build up a database that's anywhere close to what it and Booking offer.

Maintaining dominance in the online travel agency industry doesn't just require listing popular locations, hotels/rental homes, etc. It also requires extensive IT, data center, and 24/7 customer support infrastructure that is costly to build. And let's not forget the importance of advertising. Expedia spent $4.7 billion in 2018 on marketing which only Booking can match ($4.9 billion).

And of course, there's the fact that converting online visitors into customers gets a lot easier the more data you have to analyze, via AI-driven algorithms. While it's true that companies like Alphabet are potential rivals Expedia will have to deal with (that have it beat on data and understanding customers) the company has a pretty good first mover advantage built up over the past 20 years.

In the coming years, Expedia's plan is to invest most aggressively in international operations (32% of its business right now), as well as home rentals (via VRBO). It plans to slightly increase marketing as part of this growth initiative, and those costs it hopes to offset via increased efficiency in data analytics and higher conversion rates from its current user base.

Morningstar, one of the most conservative analyst firms covering Wall Street, expects operating margins to double over the next five years. Combine rising margins with revenue growth of roughly 8% to 9% generated by the fact that just 45% of the global travel market is currently online, and it's easy to see why Expedia has huge long-term growth potential.

That's not to say you can expect early dot com growth rates. But the 12% to 13% long-term EPS and FCF/share growth rates that most analysts expect (according to FactSet Research) seems reasonable to me given management' track record, the company's large financial advantages, and the growth runway before it. Dividends should ultimately grow in line with free cash flow, though the low payout ratio might allow payout growth to outpace them (payout ratio expansion).

Valuation/Total Return Potential: Safe And Growing Dividends And Double-Digit Return Potential From 3 Great Blue-Chips

Ultimately all my stock recommendations (and retirement portfolio buys) are driven by the desire for safe dividends. Combined with good long-term growth and valuations returning to fair value, these are likely to generate market-beating and preferably double-digit total returns over time.

Company Yield 5-Year Expected Earnings Growth Total Return Expected (No Valuation Change) Valuation-Adjusted Total Return Potential (5-10 Years CAGR)
Intel 2.7% 5.6% to 10% 8.3% to 12.7% 7.3% to 19.5%
Skyworks Solutions 2.1% 9.5% 11.6% 15.3% to 21.7%
Expedia 1.1% 12.7% 13.7% 15.5% to 22.2%
S&P 500 1.9% 6.1% 8.0% 1% to 7%

(Source: Simply Safe Dividends, management guidance, F.A.S.T Graphs, Morningstar, management guidance, Yardeni Research, Yahoo Finance, Multipl.com, Gordon Dividend Growth Model, Dividend Yield Theory, Moneychimp, analyst estimates)

While tech stocks aren't known for their generous yields, I consider Intel, Skyworks, and Expedia to offer a good mix of yield, growth and potential valuation boost that can likely make income growth investors pleased in the coming years.

Even assuming no valuation improvement all three should outperform the S&P 500 over the coming five to 10 years. But since valuation always matters I also adjust for that (more on this in a second) which is where these three really shine. Intel, for example, should be capable of close to double-digit total returns even assuming the low end of management's long-term guidance.

To adjust for historical valuations, I turn to my favorite blue-chip valuation method, dividend yield theory or DYT. This has been the only approach used by asset manager/newsletter publisher Investment Quality Trends since 1966. DYT, which compares a stock's yield to its historical norm, has been the only approach IQT has used for 53 years, and only on blue-chips, to deliver market-beating returns with 10% lower volatility to boot.

(Source: Investment Quality Trends)

According to Hulbert Financial Digest, IQT's 30-year risk-adjusted total returns are the best of any US investing newsletter. Basically, DYT is the most effective long-term valuation approach I've yet found, which is why it's at the heart of my retirement portfolio's strategy and drives many of my article recommendations.

DYT merely compares a company's yield to its historical norm because, assuming the business model remains relatively stable over time, yields, like most valuation metrics, tend to revert to historical levels that approximate fair value.

Company Yield 5-Year Average Yield Estimated Discount To Fair Value Upside To Fair Value 5-10 Year Valuation Boost (OTCPK:CAGR)
Intel 2.7% 2.8% -5% -5% -0.5% to -1%
Skyworks Solutions 2.1% 1.3% 38% 62% 4.9% to 10.1%
Expedia 1.1% 0.9% 17% 20% 1.8% to 3.7%

(Sources: Simply Safe Dividends, Dividend Yield Theory, Gordon Dividend Growth Model, F.A.S.T Graphs, management guidance, Moneychimp)

DYT says that Skyworks and Expedia are highly attractive buys at the moment, while Intel looks close to fair value. However, remember the tech sector is higher risk in terms of more rapid change. Which is why I also like to confirm my valuations with Morningstar's industry experts, who use very conservative growth estimates in their long-term discounted cash flow fair value models.

I use DYT as one end of my valuation range, and Morningstar's intrinsic value estimates as the other, to minimize the chance of a thesis breaking event causing me to incorrectly recommend putting money (including my own) into a value trap.

Company Current Price Estimated Fair Value Moat Management Quality Discount To Fair Value Long-Term Valuation Boost
Intel $46.80 $65 (medium uncertainty) wide (negative trend) Standard (average) 28% 3.4% to 6.8%
Skyworks Solutions $73.10 $105 (high uncertainty) narrow (stable trend) Standard (average) 30% 3.7% to 7.6%
Expedia $121.75 $183 (high uncertainty) narrow (stable trend) Standard (average) 33% 4.1% to 8.5%

(Source: Morningstar)

You'll note that uncertainty surrounding fair value estimates is higher in the tech sector than it is in most others (due to higher disruption risk). However, all three of these tech blue-chips are extremely undervalued according to Morningstar, even factoring in more conservative growth than most analysts.

For example, even though Morningstar expects management to miss its long-term operating margin target by 2%, it still considers Skyworks undervalued by 30%. Such high margins of safety (i.e. low market expectations) are always a smart strategy when dealing with an uncertain future.

For my official valuation estimates, I average DYT and Morningstar's fair value estimates (the mid-point of the valuation range)

  • Intel: 12% undervalued
  • Skyworks Solutions: 34% undervalued
  • Expedia: 25% undervalued

Dividend Sensei Blue-Chip Valuation Scale

  • 0% to 9% undervalued: buy
  • 10% to 19% undervalued: strong buy
  • 20% to 29% undervalued: very strong buy
  • 30% to 39% undervalued: ultra strong buy
  • 40+% undervalued: hyper strong buy (back up the truck)

Under my personal valuation scale, Intel is a strong buy, Expedia is a very strong buy, and Skyworks (the company I just bought for my portfolio) is an ultra-strong buy.

Just remember that all investing is probabilistic (as Peter Lynch said, "in this business, if you're good you're right six times out of ten.") so always use good risk management and the proper asset allocation for your needs.

The most important risk management rules are asset allocation (93.6% of volatility is determined by your mix of stocks/bonds/cash) and individual holding sizes. While my risk tolerance is higher than most people's (thus why I'm 100% in stocks) I am keeping my position sizing to 5% or less for new money to avoid any individual company failures from blowing up my portfolio.

Bottom Line: Intel, Skyworks, and Expedia Are Three Great Tech Blue-Chip Buys

Don't get me wrong, the nature of technology is rapid change which always comes with disruption risk. Add to that the current US/China trade war, which threatens to potentially devastate chip makers (under an unlikely but possible worst case scenario) and it's easy to understand why Intel and Skyworks have been so badly mauled in the last few weeks.

However, such periods of fear, uncertainty, and doubt are precisely the kind of long-term buying opportunities value-focused dividend investors such as myself look for. After all, you don't get to buy an industry leading blue-chip like Skyworks (as I recently did) for 10.7 times forward earnings and a 30+% discount to fair value without the market being hyper-focused on all that might go wrong to derail the bullish thesis.

For volatility tolerant investors who don't mind headline risk, and who own any tech company as part of a well-diversified and constructed portfolio (proper asset allocation and risk management), I consider Intel, Skyworks, and Expedia to be some of the dividend growth blue-chips you can buy today.

Each offers a safe and steadily growing dividend, backed up by strong balance sheets, good management, and attractive long-term growth prospects. The combination of all three makes these blue-chips likely market-beaters in the coming five to 10 years, as well as good sources of safe and growing income, which is the primary goal of myself and most of my followers.

Disclosure: I am/we are long SWKS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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