5 tech turnarounds with 3%+ yields

by George Putnam, editor The Turnaround Letter

If you are interested in tech stocks, we recommend avoiding the high-flyers and focus on well-established tech companies that pay solid dividends.  

They may be less sexy than the latest darlings, but their stockholders get paid even if the sector remains in the doldrums for some time. The companies discussed below all have solid market positions, and their stocks yield more than three percent.

Applied Materials (AMAT) is one of the world’s largest suppliers of semiconductor equipment. As such, it has been caught in the crosscurrents of shrinking sales of PC’s and growing demand for smartphones and other mobile devices.  

The stock has had a couple of decent rallies, but on the whole it has not been much of a participant in the bull market since March 2009.  

That underperformance has kept valuations very attractive; and with a fortress-like balance sheet and generous yield, it appears to be just a matter of time before shareholders get rewarded.

CA Inc. (CA), a provider of corporate IT management software and solutions, survived a massive accounting scandal early in the last decade.  

While it has survived, it hasn’t exactly thrived. Management’s turnaround strategy focuses on migrating away from a dependency on mainframe services to more general IT services, which is reminiscent of IBM’s rebound formula.  

Currently, CA is growing its cloud products and services, which looks promising. The company is recognized as having a strong pipeline and solid financials.

Cisco Systems (CSCO) is well positioned for long-term growth. It has cutting edge networking and other data-transmission products that are needed to build out several of the fastest growing markets in technology, including cloud computing, video, smart phones and social networking.  

The CEO recently highlighted a push to double the share of revenues represented by software, a higher margin business that will boost profitability.  

Dividends should continue to grow as management is on record as wanting to return 50% of free cash flow to shareholders.

Cypress Semiconductor (CY) has transformed its product line over the years from commodity-type chips to higher margin niche applications.

These more proprietary products include the company’s line of programmable system-on-chip and its TrueTouch touch-screen controller products that have been embraced by leading handset manufacturers.  

Management, still led by founder T.J. Rodgers, gets generally high marks, including the decision to divest its interest in SunPower in 2008 before the solar market collapsed.

Management has also shown to be rather adept at buying shares from both a corporate perspective as well as for their own accounts.

So we are intrigued by the company’s ongoing repurchase program and some recent insider buying. Since the very attractive dividend consumes only about one third of free cash flow, we expect it to be maintained.

Microsoft (MSFT) is not sitting still while the world passes it by. Although the company can no longer be called nimble, it is still one of the 800 pound gorillas of the tech world.  

New products could make significant inroads into the tablet and smartphone markets, and the introduction of Windows 8 should boost both the top and bottom lines. The balance sheet remains rock solid, and the recent weakness in the stock makes it look particularly attractive.

Learn more about this financial newsletter at George Putnam's The Turnaround Letter.

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