Cash-rich tech trio: IBM, Intel & Cisco

by Gregory Dorsey, contributing editor Leeb's Income Performance Letter

The technology stocks in our model portfolio are far outpacing the market this year. One factor in their favor is their fat bank accounts; these three companies are flush with cash.

Here is a brief round up of our high-tech cash machines: International Business Machines (IBM), Intel (INTC) and Cisco (CSCO).

The cash at these companies is likely to be put to work in one way or another in expanding their business, on research and development or purchasing companies with complimentary product lines.

A good portion of the cash is also likely to flow to shareholders, either directly through dividends or indirectly via share buybacks designed to boost per-share numbers.

IBM generates substantial recur-ring revenue through software licensing and support services, which together represent about 80 percent of the company’s sales.

This makes IBM a much more defensive play than in days gone by. And with the shares recently hitting record highs, investors obviously view Big Blue as a growth stock, too.

Yet even after its strong run-up this year, IBM continues to trade at modest multiples relative to both its expected growth rate and its peers.

The company had about $12 billion in cash at the end of the first half, a figure likely to rise considerably by the recent sale (for an undisclosed sum) of more than 1,000 patents to Google.

We expect the company will put a decent portion of that cash to work buying back its stock, which it has done consistently for years.

Microprocessor giant Intel continues to post record results as well. Strong corporate spending is boosting sales of the company’s computer chips for the server market, which it absolutely dominates with 94 percent market share.

PC sales have been nothing to write home about, however. And with consumers increasingly accessing the Internet via mobile devices, some might be inclined to write

Intel off as a has-been since it competes in that space with so many others in the industry. But that would be a mistake.

The company will plow more into research and development this year—including for mobile plat- forms—than rival Advanced Micro Devices will generate in revenue.

And while mobile computing has so far played only a minor role for Intel, mobile offers Intel an important revenue line whose growth rate is expected to reach the low teens in the next several years.

Greater penetration in emerging markets could add to its profit expansion. While we’re waiting for those gains to materialize, the stock continues to pay a market-beating yield and trade at a single-digit P/E.

Cisco is another company we wouldn’t be in any hurry to dismiss. Although the company has had its share of problems, it appears to have turned the corner.

Cisco has taken further steps to restructure this year, divesting underperforming businesses, streamlining operations and reducing its headcount by 13,000.

It remains a market leader in every aspect of its business: area net- works, routing, switching, wireless LANs, web conferencing, and digital video.

And to that list the company is adding servers, although Wall Street hasn’t fully begun to appreciate Cisco’s potential in this area.

Drawing on its strengths, the company’s Unified Computing System (UCS) architecture combines high-performance servers, high-speed networking, storage access, and virtualization into a compact integrated infrastructure.

While this segment will still only account for about 10 percent of Cisco’s revenue in 2012, it is growing 35 percent annually and has vaulted the company into the top tier among server manufacturers.

As an added benefit, the company is reporting strong sales of other Cisco gear related to those UCS sales.

Cisco had more than $44.6 billion in cash at the end of last quarter. And like the other tech stocks in our portfolio, the company has been using its cash to buy back stock on the open market.

The stock’s dividend payout is a modest 1.4 percent, but we think management may double it early next year.

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