Two Dividend-Paying Technology Stocks to Consider Buying Include One Pursuing TikTok

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Two dividend-paying technology stocks to consider buying posted good financial results recently that showed continued strength despite the ongoing COVID-19 crisis.

The two dividend-paying technology stocks to consider boosted sales significantly, according to their latest quarterly financial reports, even though the shutdown of many “non-essential” businesses due to the novel coronavirus forced millions of people to stay home. However, these two dividend-paying technology stocks to consider purchasing are well-known, have distinctive capabilities that helped them become industry giants and produce the huge cash flows needed to expand operations as well as sustain dividend payouts to their shareholders.

Microsoft (NASDAQ:MSFT) and Apple (NASDAQ:AAPL) have the top two market capitalizations among U.S. companies, trade at high price-to-earnings (P/E) ratios and are unquestioned technology leaders. Microsoft, the giant Redmond, Washington, computer software and systems company, reported reduced growth in its most recent quarterly results but its leaders voiced interest on Aug. 2 in buying part of the operations of the video-sharing TikTok app owned by China’s ByteDance Ltd. Microsoft could make an offer to buy all of TikTok’s operations or just those in the United States, Canada, Australia and New Zealand.

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Microsoft Is One of Two Dividend-Paying Tech Stocks to Consider

Microsoft’s lofty price-to-earnings (P/E) valuation ratio of 37.54, compared to an estimated NASDAQ P/E of 22.3, will be difficult to maintain without finding new paths for growth that could come from acquiring businesses such as TikTok. President Trump issued an executive order on Aug. 6 that cited national security concerns in banning TikTok from operating in the United States if it is not sold by its Chinese parent company to an American buyer within 45 days.

The Trump administration warned that TikTok is vulnerable to pressure from its country’s Communist government to share the personal data of American users. Specifically, President Trump’s executive order stated such data collection allows the Chinese Communist Party access to Americans’ personal and proprietary information — potentially tracking the locations of federal employees and contractors, building dossiers of personal information for blackmail and conducting corporate espionage.

“TikTok also reportedly censors content that the Chinese Communist Party deems politically sensitive… concerning protests in Hong Kong and China’s treatment of Uyghurs and other Muslim minorities,” according to President Trump’s executive order. “This mobile application also may be used for disinformation campaigns that benefit the Chinese Communist Party, such as when TikTok videos spread debunked conspiracy theories about the origins of the 2019 Novel Coronavirus.

“These risks are real.  The Department of Homeland Security, Transportation Security Administration and the United States Armed Forces have already banned the use of TikTok on federal government phones. The government of India recently banned the use of TikTok and other Chinese mobile applications throughout the country; in a statement, India’s Ministry of Electronics and Information Technology asserted that they were ‘stealing and surreptitiously transmitting users’ data in an unauthorized manner to servers which have locations outside India.’”

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President Trump’s Second Executive Order Targets China’s WeChat

A second executive order President Trump released on Aug. 6 similarly barred any transaction with China’s WeChat, a messaging, social media and electronic payment application, and its parent Tencent Holdings Ltd. by any person or any property subject to the jurisdiction of the United States. However, the order would exclude any contract agreed to without the next 45 days.

“Like TikTok, WeChat automatically captures vast swaths of information from its users,” according to President Trump’s executive order. “This data collection threatens to allow the Chinese Communist Party access to Americans’ personal and proprietary information. In addition, the application captures the personal and proprietary information of Chinese nationals visiting the United States, thereby allowing the Chinese Communist Party a mechanism for keeping tabs on Chinese citizens who may be enjoying the benefits of a free society for the first time in their lives.”

Bolt-on Business Fits Microsoft’s Growth Plans

“Microsoft always covets a robust new consumer-facing business it can bolt onto its existing platform and get in the way of its Big Tech rivals,” said Hilary Kramer, host of a national radio program called “Millionaire Maker” and head of the Value Authority and GameChangers advisory services. “That’s what makes TikTok interesting for them. As a standalone business, it might at best create a one-time, 10% step up on the revenue growth curve, but think about what integrated video messaging can do for the Xbox or what a commercial version could do for LinkedIn or even Office.”

Columnist and author Paul Dykewicz interviews money manager Hilary Kramer, whose premium advisory services included 2-Day TraderIPO EdgeTurbo Trader, High Octane Trader and Inner Circle.

TikTok May Aid Microsoft, One of Two Dividend-Paying Technology Stocks to Consider

Videoconferencing has become a must-have workplace tool that is as essential as a spreadsheet or document creation, Kramer continued. Microsoft, which has the second-largest market capitalization of any U.S. company at $1.637 trillion, already owns the Skype video-calling service but TikTok could be the key to a broader platform of video services that “outclasses everything else,” she added.

Such a deal, if it can be forged to win approval from the U.S. and Chinese governments, could put Microsoft into the social media business in a heightened way. However, four formidable giant technology stocks now involved in the social media business reported financial results after the close of trading on July 30, with Apple (NASDAQ:AAPL) and Amazon.com Inc. (NASDAQ:AMZN) notching better-than-expected performance, while Facebook (NASDAQ:FB) and Google’s parent company Alphabet Inc. (NASDAQ:GOOG) showed softening growth.

Nonetheless, the next day the share prices of three of the stocks jumped, as Apple surged 10.47%, Facebook soared 8.17% and Amazon climbed 3.70%, while Alphabet slipped 3.17%. But the previous day, a Congressional committee exploring “unfair” business practices questioned each the chief executive of each of the four companies.

Deal Could Help Microsoft as One of Two Dividend-Paying Technology Stocks to Consider

The proposed acquisition of TikTok operations in the United States, Canada, Australia and New Zealand should be a positive move for Microsoft, said Bob Carlson, leader of the Retirement Watch advisory service and chairman of the Board of Trustees of Virginia’s Fairfax County Employees’ Retirement System with more than $4 billion in assets.

“It adds a very large group of young users to supplement those Microsoft already has with its game business,” Carlson told me. “Microsoft has an excellent record of successful acquisitions.”

Ironically, Microsoft used to be the villain among tech companies, Carlson said. Now, the “negative attention” is focused on the other technology titans, he added.

“Microsoft is under the radar and can focus on running its businesses,” Carlson continued.

Another lift for the technology companies is that the global pandemic greatly boosted demand for cloud services in general, Carlson said. That trend is likely to continue and create additional opportunities for the dominant cloud service providers: Amazon, Google, Microsoft and IBM (NYSE:IBM), he added.

Pension fund Chairman Bob Carlson answers questions from Paul Dykewicz during an interview before social distancing became the norm after the outbreak of COVID-19.

Growth Slows at Microsoft, One of Two Dividend-Paying Technology Stocks to Consider

Microsoft’s earnings per share (EPS) in its fiscal fourth quarter reached $1.46, beating analysts’ $1.34 consensus estimate, while the company’s revenues jumped to $38.03 billion, topping forecasts of $36.54 billion. However, Microsoft reported a minor slowing in revenue growth of 50% in constant currency for its Azure product segment that offers a set of cloud services to help organizations build, manage and deploy applications on a global network.

The company’s shortfall in meeting the modestly higher growth expectations of analysts led Oppenheimer analyst Timothy Horan to cut his rating on Microsoft to “perform” from “outperform” on July 23, the day after the software provider released its latest financial results. Horan warned that slowing growth in Microsoft’s cloud business would boost its competition and expenses.

Such action could signal weakening growth for cloud services as enterprises cut information technology (IT) budgets and as the churn of small business (SMB) customers increases amid the current recession, Horan wrote in a research note. Oppenheimer’s reduced rating for Microsoft factored in the software company’s valuation reaching all-time highs, he added.

Chart Courtesy of www.StockCharts.com

The consensus analysts’ average price target advanced 3.2% to $227.59 after Microsoft released its latest financial results. Even so, Microsoft’s reduced growth during its fiscal fourth quarter that ended on June 30 dimmed some of the stock’s appeal, despite reporting potent profits and revenues. In fact, Microsoft’s fiscal fourth-quarter financial results beat analysts’ consensus estimates for both earnings per share (EPS) and revenues, despite the economic contraction caused by the COVID-19 crisis.

Microsoft Declares Its Azure Cloud Product Is 20% the Price of Amazon Web Services

Amazon Web Services, a subsidiary of Amazon.com (NASDAQ:AMZN), offers on-demand cloud computing platforms and Application Programming Interface capabilities to individuals, companies and governments on a metered, pay-as-you-go basis. Microsoft asserts on its website that AWS is five times more expensive than its Azure for Windows Server and SQL Server. Rarely does a company identify a competitor on one of its own website pages, but Microsoft took the unusual approach of naming Amazon Web Services directly as a high-priced rival.

Amazon.com is so popular with investors that it currently commands a P/E ratio of 120.65. However, income investors may opt to bypass it, since the stock pays no dividend.

Microsoft is all about the cloud,” said Jim Woods, who leads the Successful InvestingIntelligence Report and Bullseye Stock Trader advisory services. “The pandemic has created a work-from-home society, and that has created greater demand for safe and secure cloud computing services such as those offered by the software giant.”

Woods recommends Microsoft, which offers a current dividend yield of 0.96%, in the Prime Movers portfolio in Successful Investing. He helped his subscribers gain a 16.3% return in the stock after putting it in his Intelligence Report Tactical Trends Portfolio.

Paul Dykewicz meets with Jim Woods before COVID-19 to discuss new investment opportunities.

The Commerce Department announced gross domestic product (GDP) fell at a seasonally and inflation-adjusted 32.9% annual rate in the second quarter, Woods wrote to his Intelligence Report members on July 31. That is 9.5% drop compared with the prior quarter, and it is the steepest decline in the more than 70 years that the Commerce Department has kept GDP records, he added.

Apple Gains Spot as One of Two Dividend-Paying Technology Stocks to Consider

Woods praised the financial performance of Apple, which beat consensus analysts’ estimates on both the top and bottom lines. Apple’s revenues in its fiscal third quarter reached $59.69 billion, beat analysts’ consensus estimates by 14.3%, and its EPS of $2.58 topped forecasts by 53 cents. The company also announced a 4-for-1 stock split.

Apple’s market capitalization of $1.948 trillion is the largest in the world, its P/E ratio of 34.56 is slightly lower than Microsoft and it pays a dividend yield of 0.75% that could be enough to entice investors who like income along with share price appreciation. Plus, Apple shares rose by 10.47% on July 31, the day after it announced its financial results, with analysts from Piper Sandler, Jefferies and D.A. Davidson raising their price targets on the stock to between $450 and $480 per share.

Chart Courtesy of www.StockCharts.com

Investors May View Microsoft as an Enhanced Buying Opportunity If Its Price Drops

“Results from Microsoft were baked into the stock, but results from Apple, Amazon, Google and Facebook obviously showed that one shouldn’t bet against the U.S. consumers and businesses,” said Bryan Perry, who heads the Cash MachinePremium IncomeQuick Income TraderHi-Tech Trader and Breakout Profits Alert advisory services.

Microsoft ranks as the world’s most trusted technology stock, even if its cloud revenues came in a “tad light,” Perry said. Microsoft’s other businesses, such as Outlook 365, LinkedIn, Surface, Xbox, TEAMS and the vaunted Windows 10 operating system, are “very strong, added Perry, who told me a “decent entry point” for new investors would be $195 or less.

Paul Dykewicz interviews investment guru Bryan Perry at the Orlando MoneyShow.

Microsoft’s management affirmed guidance for earnings growth of about 7% in the coming year. Compared to the S&P 500, where profit contracted 44% last quarter, and may end 2020 with a 20% drop, dividend-paying Microsoft shines, Kramer continued.

“Everything else being equal, I’d rather own Microsoft than the S&P 500 as a whole,” Kramer said. “However, the time to buy in was when the stock had been beaten down to $135 just four months ago. At the bottom, mighty Microsoft was available for only 23 times earnings. This was clearly a bargain that Wall Street couldn’t ignore.”

Microsoft Loses Market Share in Key Cybersecurity Services, Analyst Cautions

Andrew Nowinski, an equity research analyst with D.A. Davidson, warned that Microsoft perennially loses market share in the cybersecurity niches of email, identity and endpoint security. Microsoft seems more focused on fixing “vulnerabilities” in Windows, which is a “huge source of breaches,” than in providing best-in-class solutions in any of those three areas, he added.

Keep in mind the COVID-19 crisis has caused 19,091,446 cases and 714,767 deaths globally, along with 4,883,646 cases and 160,104 deaths in the United States, as of Aug. 7. America has more cases and deaths than any other country, including China, where COVID-19 originated.

Microsoft is a computer software powerhouse that may view TikTok as a potential source of growth. Investors willing to wait for Microsoft to try to structure a deal to acquire the U.S., Canadian, Australian and New Zealand operations of TikTok within the 45-day deadline set by President Trump may find a chance to purchase the software company’s shares at a reduced price if the negotiations show signs of failing.

 Paul Dykewicz, www.pauldykewicz.com, is an accomplished, award-winning journalist who has written for Dow Jones, the Wall Street JournalInvestor’s Business DailyUSA Today, the Journal of Commerce, Seeking Alpha, GuruFocus and other publications and websites. Paul, who can be followed on Twitter @PaulDykewicz, is the editor of StockInvestor.com and DividendInvestor.com, a writer for both websites and a columnist. He further is editorial director of Eagle Financial Publications in Washington, D.C., where he edits monthly investment newsletters, time-sensitive trading alerts, free e-letters and other investment reports. Paul previously served as business editor of Baltimore’s Daily Record newspaper. Paul also is the author of an inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by former national championship-winning football coach Lou Holtz. The book is endorsed by Joe Montana, Joe Theismann, Ara Parseghian, “Rocket” Ismail, Reggie Brooks, Dick Vitale and many others.

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