Value investor Jason Clark, in The Prudent Speculator—which focuses on broadly diversified, long-term portfolios—looks at a trio leading technology firms.
Apple (AAPL)
We believe that Apple still has plenty of room to grow, despite its already significant position as global consumer technology leader.
From a sales standpoint, we expect Apple Watch and Apple Pay to become significant contributors. We don't hold an expectation for that to happen overnight, though, as the payment and wearable technology is still very new.
On a different note, there are some investors out there pushing for Apple to distribute more cash to shareholders; however, we are content at present with the $17 billion in share repurchases last quarter and the $2.8 billion paid in dividends last quarter.
The 1.8% yield, while arguably modest relative to some of its peers, leaves the company with plenty of dry powder to make strategic acquisitions and grow the business. We like that Tim Cook and the board are maintaining a long-term view of capital management. Our Target Price for AAPL has been lifted to $128.
IBM (IBM)
IBM reported sales and earnings for the third quarter of 2014 below the consensus estimates. Nevertheless, the firm is working hard to increase efficiency and make acquisitions to vertically integrate units in areas of particular growth interest.
Watson, IBM's 'smart' computer—famous for beating Jeopardy-legend Ken Jennings—has also been instrumental in advancements in the security and speed of cloud-based applications.
We are disappointed that IBM had to make a substantial payment to GlobalFoundries to take its chip manufacturing business, but recognize that it's sometimes okay to cut losses. In that sense, we are pleased that the company offloaded that business.
IBM's dividend yield is up to 2.7% while the P/E ratio has broken into the single digits. Our Target Price has been reduced to $232, but we remain long-term fans of Big Blue.
Microsoft (MSFT)
Software giant Microsoft beat on both the top and bottom lines in the latest quarter; happily, each of its four main segments improved meaningfully.
We like that Microsoft is working hard to make all of the different versions of Windows work together. In our view, it's extremely important from a market share standpoint to have devices that seamlessly interact.
We feel that the company has lagged behind the competition in this area in recent years and we are pleased that MSFT is making progress to bring everything back together.
We also believe the Cloud segment will be a key source of growth going forward and keeping focused on this aspect of the business will be critical to success.
The company returned $4.6 billion to shareholders last quarter via dividends and buybacks and we are pleased the next dividend to be paid will be $0.31 per share, an increase of 11%, which brings the yield to 2.7%. Our Target Price has been raised to $54.
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