Sector ETFs

Technology Stocks in the S&P 500 (Download Excel Spreadsheet)

Investing in Technology Stocks is a great way to build long term wealth as “tech stocks” tend to out perform the broader market such as the S&P 500 over the long haul.

In fact, some of the richest investors in the world including Bill Gates, Jeff Bezos, Larry Page, Sergey Brin and Larry Ellison have earned fortunes by building technology companies like Microsoft, Amazon, Google, Oracle among others.

The S&P 500 Technology Sector as measured by XLK ETF includes 71 technology companies ranging from a diverse array of industries including software development, Information Technology Services, hardware and peripherals manufacturers, semiconductors and equipment, communications equipment and electronics.

When investors think of technology stocks, they remember the “dot com” bubble of 2000 when excessive speculation in Internet related stocks caused the entire stock market to crash. That too, in excess of 50%.

Things are way different today. Technology Stocks are cash cows generating billions of dollars in revenues and cash flows. As an example, Apple and Microsoft combined generated revenues of $285 billion in 2019.

In this article, we review top 5 technology stocks that we like based on dividend yields, revenues and cash flows, forward price to earnings ratio as well as competitive moat around their business.

This piece also provides an Excel Spreadsheet of all 71 Stocks in the XLK Technology ETF with useful metrics including:

  • Market Capitalization
  • 2019 Revenues
  • Forward Price to Earnings (PE) Ratio
  • Dividend Yield
  • Dividend Payout Ratio
  • 5 Year Revenue Growth
  • 5 Year Earnings Growth
  • 5 Year Dividend Growth
  • Price to Sales Ratio
  • Return on Equity (%)
  • % of Institutional Shareholders

Table of Contents

This article is broken down in to sections, feel free to jump to the area that interests you.

What Sectors Comprise of S&P Technology (XLK) ETF?

Software comprises over 30% of the S&P Technology Sector with companies like Microsoft, Adobe, Salesforce, Oracle, Paypal and Intuit dominating the markets. Next is Information Technology Services companies like Accenture, IBM, SAP, Oracle and Microsoft. The third group is Technology Hardware which includes Apple, HP, Dell, Motorola, etc.

The fourth largest group is Semiconductors and chip makers including Intel, NVidia, Lam Research, Broadcom, Qualcomm, Texas Instruments among others. The fifth group is communications equipment makers like Cisco which designs internet modems and routers.

Attached screenshot summarizes each sector in the S&P Technology ETF.

Technology Sector Industries

Performance of XLK Versus S&P 500

In the last decade, XLK ETF has crushed the performance of the broader market. XLK has risen 356.3% as of March 2020 while the S&P has risen 166.56%. This means technology stocks have performed 2 times better than the S&P 500 index.

XLK S&P 500 Technology ETF Long Term Performance

How to Use Excel Spreadsheet of Technology Stocks

Click here to download a Microsoft Excel Spreadsheet containing list of all stocks in the S&P 500 Technology ETF. Below are instructions on how to screen the worksheet to find investment ideas.

Screen #1: Highest Dividend Yield Stocks in S&P 500 Technology (XLK)

Step #1: Open file after downloading.

Step #2: Click anywhere on Row 1, hit the “Data” tab and click “Sort.” Enter these parameters.

Sort By: Dividend Yield, Sort On: Values and Order: Largest to Smallest

Attached is a screenshot of the Excel file displaying the results of this screen.

The top 10 highest dividend yielding stocks in XLK are shown below.

Symbol Name Market Capitalization ($M) Revenue ($M) Forward PE Ratio Dividend Yield
STX Seagate Tech Ord Shs 12,854,692 10,390.00 M 7.65 5.28%
IBM International Business Machines 113,476,360 77,147.00 M 11.09 5.07%
AVGO Broadcom Ltd 107,634,240 22,597.00 M 13.79 4.82%
DXC Dxc Technology Company 4,828,311 20,753.00 M 11.49 4.41%
NTAP Netapp Inc 9,731,788 6,146.00 M 21.91 4.36%
HPE Hewlett Packard Enterprise Comp 15,505,060 29,135.00 M 10.89 4.00%
JNPR Juniper Networks 7,066,667 4,445.40 M 24.73 3.74%
WDC Western Digital Cp 16,360,549 16,569.00 M 5.45 3.65%
WU Western Union Company 9,233,277 5,292.10 M 10.28 3.58%
GLW Corning Inc 18,999,064 11,503.00 M 20.61 3.54%

Screen #2: Largest Market Capitalization Stocks

Step #1: Click anywhere on Row 1, hit the “Data” tab and click “Sort.” Enter these parameters.

Sort By: Market Capitalization, Sort On: Values and Order: Largest to Smallest

Attached is a screenshot of the Excel file displaying the results of this screen.

 

Symbol

Name Market Capitalization ($M) Revenue ($M) Forward PE Ratio Dividend Yield
AAPL Apple Inc 1,264,644,992 260,174.00 M 17.26 1.07%
MSFT Microsoft Corp 1,228,909,056 125,843.00 M 27.12 1.26%
V Visa Inc 361,807,616 22,977.00 M 28.07 0.65%
MA Mastercard Inc 288,476,064 16,883.00 M 34.82 0.56%
INTC Intel Corp 238,528,288 71,965.00 M 11.74 2.37%
CSCO Cisco Systems Inc 168,278,112 51,904.00 M 18.37 3.53%
NVDA Nvidia Corp 162,816,480 10,918.00 M 40.1 0.24%
ADBE Adobe Systems Inc 162,750,160 11,171.30 M 47.88 0.00%
ORCL Oracle Corp 151,946,320 39,506.00 M 16.21 2.03%
CRM Salesforce.com Inc 145,538,960 13,282.00 M 130.84 0.00%

Screen #3: Stocks with the Lowest Price to Earnings (PE) Ratio

Step #1: Click anywhere on Row 1, hit the “Data” tab and click “Sort.” Enter these parameters.

Sort By: Forward PE Ratio, Sort On: Values and Order: Smallest to Largest

Attached is a screenshot of the Excel file displaying the results of this screen.

Top 10 stocks in XLK ETF with the lowest forward price to earnings ratios are shown below.

Symbol Name Market Capitalization ($M) Revenue ($M) Forward PE Ratio Dividend Yield
MU Micron Technology 57,039,160 23,406.00 M 4.34 0.00%
WDC Western Digital Cp 16,360,549 16,569.00 M 5.45 3.65%
STX Seagate Tech Ord Shs 12,854,692 10,390.00 M 7.65 5.28%
XRX Xerox Corp 6,658,168 9,830.00 M 8.24 3.20%
AMAT Applied Materials 53,068,848 14,608.00 M 8.75 1.45%
LRCX Lam Research Corp 42,850,788 9,653.56 M 9.87 1.56%
WU Western Union Company 9,233,277 5,292.10 M 10.28 3.58%
HPE Hewlett Packard Enterprise Comp 15,505,060 29,135.00 M 10.89 4.00%
ADS Alliance Data Systems Corp 3,458,269 7,791.20 M 10.97 3.47%
IBM International Business Machines 113,476,360 77,147.00 M 11.09 5.07%

Now let’s review our Top 5 Technology Stocks in the S&P 500.

1) Lam Research Corp. (LRCX)

Lam Research Corp. (LRCX) is our #1 pick due to strong out performance to the broader S&P 500 index over the last decade, a price to earnings ratio of just 17.6 times 2020 earnings, 1.6% dividend yield with a strong 52.8% dividend growth annualized over the last 5 years.

Over the last decade, while the S&P 500 has risen 166.5%, Lam Research Corp. has appreciated a whopping 723%! This performance is shown in the chart below.

We like this company due its strong market position and demand from Cloud Computing, Internet of Things (IoT), self driving cars and other upcoming technologies like robotics.

Lam Research supplies clients globally with water fabrication equipment used in the semiconductor industry. Its customer base includes memory, foundry and logic devices customers as well as DRAM applications.

Lam Research’s technology allows customers to attach integrated circuits on to wafers which require hundreds of individual processes that need to be done precisely and in a cost-efficient manner.

Lam Research sports a $42.85 billion market capitalization and pays a 1.6% dividend yield. The company generated $9.65 billion in revenues for 2019 and earned a net income of $2.191 billion, implying a healthy net profit margin of almost 23%.

Income investors will be happy to learn the company generated a record $3.2 billion in cash from operations in 2019 and the Board of Directors has issued a $5 billion share repurchase program through to 2022.

Over the last decade, Lam Research has grown its revenues from a tiny $2.134 billion in 2010 to a whopping $9.65 billion in 2019. This represents a stunning compounded annual growth rate (CAGR) of 16% which is one of the reasons we love this stock.

The company has tailwinds in its favor including the launch of fifth generation wireless communication technology (5G) which is expected to eliminate bandwidth and latency issues that have slowed the adoption of power consuming technologies like virtual reality, cloud computing and gaming, video streaming, autonomous driving and Internet of Things.

In its 4th Quarter, 2019 earnings, management has guided for total revenues of $2.8 billion for March 2020 quarter, a $200 million year over year increase. Operating Margin is expected at 28% while non-GAAP Earnings per Share is expected to come in at $4.55 per share, a healthy 9% increase year over year.

2) Broadcom Inc. (AVGO)

Broadcom Inc. (AVGO) is one of our top picks due to crushing out performance to the broader market S&P 500, strong financial management, 55% annualized dividend growth rate over the last 5 years (although this rate of growth is not sustainable), a healthy 4.8% dividend yield and a forward price to earnings ratio of just under 12 times.

Over the last decade while the S&P 500 has risen 166.5%, Broadcom has risen a whopping 1,674%! Attached chart shows this strong out performance.

Broadcom designs software and solutions that are used by end customers for enterprise and data center networking, home Internet connectivity, set-top boxes, Broadband connection, power generation, telecommunications lines, electronic displays and more.

The company has a strong portfolio of over 24,000 Intellectual Property (IP) patents and 77% of its 2019 revenues were derived from semiconductor solutions including networking, broadband, wireless, enterprise and storage applications.

Broadcom is valued at $107.6 billion market capitalization and pays a 4.8% dividend yield. The company generated $22.6 billion in revenues for 2019 and earned a net income of $2.72 billion, implying a 12% net profit margin.

Income investors will be happy to learn the company generated a record $9.265 billion in free cash flow in 2019, even after spending $4.7 billion in Research & Development costs.

Over the last decade, Broadcom has grown its revenues from just $2.093 billion in 2010 to $22.597 billion in 2019. This represents a brilliant 27% compounded annual growth rate (CAGR) over 10 years.

This growth was largely fueled by huge acquisitions such as purchase of CA Technologies for $19 billion in November 2018, Symantec Security for $10.7 billion in August 2019 and Brocade Communications Systems for $5.9 billion in November 2016. A full list of all Broadcom acquisitions over the years can be found on Wikipedia.

In recent earnings results released March 12th, 2020, Broadcom generated revenues of $5.858 billion and $2.214 billion in free cash flows. We like the company’s superb dividend growth rate of 55% annualized over the last 5 years, even though this rate of growth is not sustainable.

Broadcom has a competitive advantage in that it designs semiconductor chips for high end smartphones such as the recently released World’s first Wi-Fi 6E Chip that essentially doubles Wifi speeds and reduces latency by half. The chip, known as BCM4389, also facilitates a speed of over 2 Gbps and achieves 5 times better battery utilization.

To continue growing the company, management recently added a new division called Infrastructure Software. By buying high margin companies that make software products related to semiconductors and solutions, the company is building a powerhouse department  that will fuel growth in the future.

Through this strategy, management has achieved a 10% growth in gross margins from 2015’s gross margin of 60% of net revenue to 71% for 2019. We continue to believe in management’s strong execution and think Broadcom is a great tech stock to hold for the long term.

3) MasterCard (MA)

MasterCard is our #3 pick thanks to consistent revenue growth, a dominant market leading position in global payments, a stunning 23% dividend growth rate annualized over the last 5 years, rapid transformation from just a consumer credit centric company to debit cards and prepaid solutions, data analytics, loyalty platforms and cross-border transaction processing.

MasterCard has handsomely out performed the S&P 500 over the last decade. During this period, the S&P 500 has risen 143% while MasterCard has gained 1,010%. Attached chart shows this strong performance.

MasterCard’s core business is allowing consumers to access funds and make payments in over 150 currencies and in more than 210 countries worldwide. The 3 main types of transactions include consumer credit, consumer debit and prepaid, and commercial transactions. Attached screenshot from the company’s Investor Presentation shows the volume of money processed for each of these transactions.

MasterCard processed $2.67 trillion in Gross Dollar Volume (GDV) of credit transactions, $3.059 trillion in debit and prepaid and $732 billion in commercial. From this fact, we learn MasterCard is highly exposed to the overall well being of the consumer globally.

The more consumers spend in credit and debit transactions thanks to a strong job market and low unemployment, the higher revenues MasterCard earns from its fees on each transaction.

MasterCard is valued at $271.4 billion market capitalization and pays a 0.6% dividend yield. Although this yield is low, the dividend has grown at a stunning rate of 23.2% annualized over the last 5 years. For full year 2019, MasterCard generated $16.9 billion in net revenues, a 13% growth over 2018’s total revenues of $15 billion.

The company earned a net income of $8.1 billion, implying a whopping 48% net profit margin. Even powerhouse companies the likes of Google, Microsoft or Apple do not generate such net profit margins.

Over the last decade, MasterCard has grown its revenues from $5.54 billion in 2011 to $16.9 billion in 2020. This represents a compounded annual growth rate (CAGR) of 11.8%. This rate of growth is liked very much by investors as MasterCard trades at a high valuation.

As of March 2020, MasterCard trades at a forward price to earnings ratio of 30.31, while the S&P 500 trades at 15.2 times 2020 earnings. This is essentially double the valuation of the broader market. Other metrics such as price to book of 46 times and price to sales of 16 times also prove elevated valuations of the stock.

In its 4th Quarter, 2019 earnings released on January 29th, 2020, the company earned net revenues of $4.4 billion for the quarter, a strong 16% growth over 2018’s quarter of $3.8 billion. Gross dollar volume rose 12% while cross-border volume increased by 16% and total operating expenses decreased by 22%.

We like that Board of Directors has authorized a $8 billion share repurchase program announced on December 3rd, 2019. This becomes effective once the company’s last share repurchase program of $6.5 billion ends with about $300 million left to buy.

4) Texas Instruments Inc. (TXN)

During periods of increased market volatility due to the Corona Virus, investors look for strong cash flowing companies with a great track record of paying and growing dividends.

Texas Instruments handsomely meets this criteria. Texas Instruments has increased its dividends for 16 years in a row, generated $5.8 billion of free cash flow in 2019 and has reduced its share count by 46% since 2004!

Dividend investors will be happy to learn the company has increased its dividends at a compounded annual growth rate (CAGR) of 21% over the last 5 years.

We like to invest in stocks that are winning. Over the last 10 years, Texas Instruments has handily out performed the S&P 500 index. During this period, TXN Stock has gained almost 500% while the S&P 500 has risen 183%.

Texas Instruments designs and manufactures semiconductor chips which are essentially the “brain” of electronic systems and sells them to electronics makers all around the world.

The company has 2 divisions, 1) Analog and 2) Embedded Processing. Analog technology converts real-world signals like sound, temperature, pressure or images to digital data. Analog is also used to store, move and convert power.

The 2nd division, “Embedded Processing” makes products that allow electronic systems to do specific tasks or act like the “brain.” Examples include micro controllers used in electronic toothbrushes or entertainment systems used in cars. Analog segment generated $10.22 billion in 2019 revenues  while Embedded Processing generated $2.94 billion.

As shown by the screenshot, Industrial and Automotive markets are the most important to the company’s revenues. These markets comprised 57% of total revenues in 2019.

The company sells 80,000 products to over 100,000 customers which makes the brand a competitive moat.

Texas Instruments sports a $99 billion market capitalization and pays an attractive 3.4% dividend yield. What’s even more appetizing is the fact the company has grown its dividend at a compounded annual growth rate (CAGR) of 21% over the last 5 years.

The business generated $14.38 billion in revenues in 2019 and earned a net income of $5 billion. This implies a very strong 35% net profit margin.

Over the last decade, Texas Instruments has grown its revenues from $13.96 billion in 2010 to $14.38 billion in 2019. There is not much growth there. However, investors are paying a premium for this stock due to its strong capital management program.

Since 2004, management has increased its dividend from just 9 cents a share in that year to $3.60 in 2019. This represents a stunning 20% compounded annual growth rate (CAGR).

Attached chart below shows why Texas Instruments has not had much revenue growth over the last decade. Due to changing times, the company has divested assets in Wireless (legacy) and Other segments which were declining.

The company’s 2 largest divisions, Analog and Embedded Processing are seeing 10 year growth rates of 6% annualized and growing 30 to 40 basis points in market share annually.

Thanks to strong financial management, investors are paying a premium for TXN Stock. It trades at 21 times forward (2020) earnings, 11 times price to book and 7 times price to sales.

As a comparison, the S&P 500 trades at 15.2 times forward earnings. We like this stock over the long haul for its steady dividend growth and free cash flow. We would not buy this stock given current valuations, but a 10% to 20% market correction presents a significant buying opportunity for long term investors.

5) Apple (AAPL)

Apple is our #5 technology stock pick thanks to dominating market share in the smartphone business, competitive moat around its technologies, share repurchase program of up to $175 billion, 5 year average annualized dividend growth rate of 10.4% and strong growth in the company’s Wearables, Home and Accessories and Services segments.

Over the last decade while the S&P 500 has risen 143%, Apple Stock has gained 964% which is a phenomenal out performance.

Apple designs, manufactures and sells smartphones, personal computers, tablets, wearable devices, accessories and variety of services through the Apple Store and iCloud.

For fiscal year 2019, iPhone revenues were$142.38 billion, comprising 55% of total revenues. iPhone sales saw a decline of 14% year over year from 2018’s $164.88 billion.

Strongest growing categories in 2019 are Wearables, Home & Accessories generating $24.48 billion in revenues, a 41% year over year growth. The next best category was Services growing 16% year over year followed by iPad.

Apple is valued at $1.22 trillion market capitalization and pays a 1.1% dividend yield. We like the dividend growth rate which averages 10% annualized over the last 5 years. Apple generated $260.17 billion in total revenues for 2019 and earned a net income of $55.26 billion. This implies a 21.2% net profit margin which is a very healthy margin.

Over the last decade, Apple has grown its revenues from $65.23 billion in 2010 to $260.2 billion in 2019. This represents a stunning 14.8% compounded annual growth rate (CAGR). More recently however, Apple has become a mature company with sales declining 2% in 2019.

In its most recent earnings release for 1st Quarter, 2020, Apple posted its highest ever quarterly revenue at $91.8 billion. This is up 9% year over year and diluted earnings per share came in at $4.99 per share, up 19% year over year.

Tim Cook, CEO quotes, “We are thrilled to report Apple’s highest quarterly revenue ever, fueled by strong demand for our iPhone 11 and iPhone 11 Pro models, and all-time records for Services and Wearables.”

He adds, “During the holiday quarter our active installed base of devices grew in each of our geographic segments and has now reached over 1.5 billion. We see this as a powerful testament to the satisfaction, engagement and loyalty of our customers — and a great driver of our growth across the board.”

Investors love management’s strategy to buy back its own shares and are paying a premium for Apple Stock. AAPL currently trades at 21 times forward (2020) earnings while the S&P 500 trades at 15.2 times forward earnings. Apple also trades at 13.6 times book value and 4.7 times price to sales, which are elevated valuations.

Attached is a summary of Apple’s Capital Return program over the last 8 years. In first quarter 2020, Apple bought back $20 billion of its own shares and paid $3.5 billion in dividends.

From the program’s initiation in 2012 to first quarter, 2020, Apple has bought back $326.1 billion of shares and paid out total dividends of $92 billion.

Apple shares have gained 60% over the last year. The capital return program has had a huge impact on the company’s earnings per share growth, and thus leads to a higher stock price.

 

 

 

 

 

 

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