PA ANALYSIS: Why tech is not all about growth

In the not too distant past, the notion of investing in technology for anything but capital growth would have been scoffed at.

PA ANALYSIS: Why tech is not all about growth

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With fund names such as Gartmore TechTornado launched before the dotcom bubble burst at the start of the century, investors knew they were opting for a high-risk proposition but with the potential for high rewards.

Indeed, I was lucky enough to be on a trip to Silicon Valley just five years ago, and even then there was a perception among many of the companies I visited that the payment of a dividend seemed to be some form of admission that they had entered an ex-growth period. In an industry built on a reputation of trying to achieve rapid growth, this was an admission many didn’t want to make.

However, perceptions began to alter in 2012 when the tech giant Apple paid its first dividend since 1995, following hot on the heels of Cisco which paid its first ever dividend the year before. Suddenly global equity income and US income managers were looking at tech in a new light.

One fund launched around this time was the Fidelity Global Dividend Fund, and manager Dan Roberts says the tech sector has proved a “fertile hunting ground” in the time since.

Today he says the sector accounts for about 11% of the fund’s portfolio, although this exposure is focused on what he would term “old tech stocks”.

“When it comes to technology stocks, it is undoubtedly the rapidly growing and fashionable ‘FAANG’ stocks which have attracted the most attention in recent years,” Roberts says.

“Companies such as Amazon, Apple, Netflix and Google have grown exponentially, adding over $250bn of market cap so far this year. Remarkably, this is broadly comparable to the annual GDP of Chile.”

While he admits these headline performance figures may be impressive, he notes the fact many of them do not tend to pay a dividend means the wider sector can often be overlooked, or under-represented in global equity income portfolios.

“This area looks less exciting than the new wave of tech giants, but provides a more interesting opportunity set for valuation-aware dividend investors,” says Roberts.

“As more mature businesses within the sector, they have ‘grown up’ to dominate their fields and display a number of attractive attributes: well-established, diversified businesses, recurring revue streams with plenty of cash on the balance sheet, proven track records, and a strong history of paying consistent dividends.

“Furthermore, as prospective growth rates have fallen, valuations have become even more attractive. This is in stark contrast to the FAANG stocks where it is questionable whether there is sufficient earnings support in the underlying businesses to warrant current valuations.”

Two companies Roberts picks out are Microsoft and the US semiconductor manufacturer KLA-Tencor.

“Microsoft is a good example of an old tech company which offers investment potential,” he says. “It has been a significant holding in the fund since launch – a period where it has continued to successfully transform its business to the new world of cloud and subscription.

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