Cash cows in tech: 'Four Horsemen'

by Ian Wyatt, editor $100K Portfolio

"The Four Horsemen of Technology" have a strong history of financial success and have conquered their respective industries. They have evolved into stable, secure and reliable businesses, yet their stocks trade at historically low valuations.

Here's a look at Intel (INTC), Microsoft (MSFT), Cisco Systems (CSCO) and IBM (IBM). Now could be the premiere time to invest in America's greatest technology stocks and earn above-average returns for years to come.

It's a natural progression in business. Companies evolve over time from startups to cash cows. The phases take different amounts of time, but the order of transformation always follows the same path: startup, growth, expansion and mature business.

And over the past 30 years, these companies have been the power players of the technology sector. But these stocks have gone through another type of transformation.  They also now  become value names.

Intel got its start when two Fairchild Semiconductor employees left the company to start up a new venture. Intel initially had mixed results, but the invention of the personal computer altered the semiconductor industry.

Buoyed by the success of IBM's personal computer in the 1980s, Intel's growth soared. By the 1990s, Intel's Pentium processer was a household name.

The technology upgrade solidified the company within the industry. With a focus on making its products faster and smaller than the competition, Intel today remains a dominant force in personal electronics.

Sales rebounded dramatically in 2010 and continued to grow to a record $53.9 billion through 2011. Margins also expanded and the company logged record operating income last year. The stock also pays a $0.84 per share dividend for a 3% yield.

Perhaps one of the greatest American success stories of our generation is that of Microsoft. Bill Gates but he went from being a broke Harvard dropout to rank at the top of Forbe's Billionaire list in the United States with a net worth of $61 billion.

He also took a young software start-up from less than $1 million in revenue in 1975 to a company that generated $73 billion in annual sales last year.

Microsoft struggled for prominence early on, but collaboration with IBM in 1983 began its pathway to success. With the backing of IBM, Microsoft released in 1985 a graphical operation system - Windows - that changed the way people used computers.

The introduction of Widows also made the personal computer accessible to consumers who had no technical or computer science experience. For the past two decades, Windows has been the most popular operating system in the world and is commonplace on most computers.

Microsoft sales have fluctuated but remain in an upward trajectory. Over the past three years, sales have increased 20% to reach $69.9 billion in 2011. Meanwhile, the company's profit margins remain very stable. Microsoft currently pays an $0.80 per share dividend for a 2.6% yield.

Cisco was founded only 28 years ago and had its IPO in 1990.  When the stock debuted, it was valued at just $224 million.  Today, the network giant is worth more than $100 billion.

The company hit its stride in 1996 when the Internet wave was unfolding. By 2000, during the height of the Internet bubble, sales of routers and other networking equipment temporarily vaulted Cisco to the status of the most valuable company in the world based on market capitalization.

Since the peak of the tech bubble, Cisco's growth and market cap have declined. Nevertheless, Cisco remains the biggest player in the networking industry and we wouldn't have nearly the same quality of Internet access without their technology.

Though Cisco's recent growth has lagged its peers, it remains a force in the industry. Management reported record sales of $43.2 billion last year, which was a 7.5% increase from 2010. The stock also pays a $0.32 per share dividend, or a 1.7% yield.

Cisco has been an underperformer. While the timing of our purchases in 2010 and 201 was hardly ideal, the stock remains a cornerstone of the tech sector.

Though IBM is a renowned tech name, many people may not know what they do anymore. That's because Big Blue has been around for more than 125 years and is constantly evolving its product line into business services.

While its product lineup has changed from punch cards to computers, IBM always remained dedicated to innovating business services. Its biggest contribution was likely the development of computer hardware and software in 1964. At the time, IBM owned 70% of the worldwide computer market.

IBM's revenue, operating income and margins have expanded in each of the last three years. Also during that time IBM increased its dividend, implemented a share buyback and reported record EPS. The stock currently pays $3.40 per share in cash dividend for a 1.7% yield.

IBM now ranks as the fifth largest company in the United States. Its hardware business has slowed but its business software has become indispensible in the corporate world.

In addition to dividends, these investments offer the upside of stock price appreciation -- a winning combination for investors, in my opinion.

Each of the four is undervalued based on current valuations -- but investors shouldn't expect that to last too much longer.

Learn more about this financial newsletter at Ian Wyatt's $100K Portfolio.

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