5 Dividend Paying Giants Of Technology Trading At Absurdly Low Valuations?

Any owner of a business will tell you that the value of their business is based upon the earnings and cash flows it generates on their behalf. The more profitable the business is, the more valuable it is to its owners. In addition to just being common sense, this principle is also mathematically sound. When it comes to how much money the business makes, more money is better than less. Consequently, the more money the business makes for the owner, the higher the price they would ask if they decided to sell it. This would not be a surprise to any prospective buyer. What would surprise a prospective business buyer is finding a business that generates above-average earnings and cash flows being offered for sale at a below-average price. If a prospective business buyer was lucky enough to come across such a situation, they would quickly gobble it up. This would be especially true if they have already conducted due diligence and were therefore confident of the strength of the business. In the private sector, the good fortune of finding an above-average business offered at a below-average value very rarely happens. But, if for some strange stroke of good luck it did, the shrewd business buyer would be thankful for this extraordinary opportunity.  However, in the public sector, better known as the stock market, the irrational pricing of a publicly traded business is a more common occurrence.  But, unlike the private sector, the public market is an auction where price points are continuously changing minute by minute. Consequently, buyers of businesses in the public market tend to focus more on price volatility than they do business values. A rising stock price tends to attract buyers, while a falling stock price tends to repel them.  Therefore, a significant amount of buying high and selling low tends to occur. On the other hand, common sense should once again dictate, that the value of the public business is derived from how much profit it generates, just as it does with the private business. The most renowned investors of our time understand these principles and although they speak to them often, it's often upon deaf ears. The following quotes, one from the venerable Warren Buffett and the other from investor extraordinaire Peter Lynch summarize what has been said so far: "For some reason, people take their cues from price action rather than from values. What doesn't work is when you start doing things that you don't understand or because they worked last week for somebody else. The dumbest reason in the world to buy a stock is because it's going up." Warren Buffett "What makes stocks valuable in the long run isn't the market. It's the profitability of the shares in the companies you own. As corporate profits increase, corporations become more valuable and sooner or later, their shares will sell for a higher price." Peter Lynch, Worth Magazine, September 1995 The Average Company as our Benchmark This article is going to look at five technology giants, first from the perspective of business results only, and later those business results will be correlated to public stock prices.  But in order to establish a clear perspective and a benchmark to measure against, we will start by looking at the S&P 500. The following F.A.S.T. Graphs looks at this proxy for the average publicly traded business from the perspective of earnings and dividends only. In other words, the following graph focuses on the business results of the average company. The S&P 500 The orange line on the graph plots earnings-per-share since calendar year 2003. The green shaded area represents a mountain chart of those earnings, and the light blue shaded area depicts dividends paid out of the earnings (green shaded area). The 8.9% earnings growth rate is listed to the right of the graph. The orange line also represents an average PE ratio of 15 which is calculated based on a widely accepted formula for valuing a business. Therefore, it's no coincidence that a 15 PE ratio also happens to be the historical average for the S&P 500 over the past 150 years. To summarize and clarify, the average company as represented by the S&P 500 has grown earnings at the rate of 8.9%, and those earnings are typically valued at an average or normal PE ratio of 15. The graph also illustrates a great deal of cyclicality in the earnings performance of the average company. A quick glance at the bottom of the graph shows that the average company experienced a fall in earnings of 6% in 2007 and 40% during the recession of 2008. Therefore, our benchmark is earnings growth of less than 10% on average, with cyclicality and uncertainty during weak economic times. Here is what our Five Technology Giants have Earned We're going to review our five technology giants in a specific order that will be revealed later in the article. Also, since each of these five technology companies are well known, we're going to dispense with any descriptions or discussions about what they do. This exercise is going to be strictly by the numbers, where we ask the reader to keep the benchmark S&P 500 numbers in mind as we review each example. Intel Corp. (INTC) Our first example is Intel Corp. (INTC). As will become evident as we review the other four companies, Intel is the most cyclical of the group.  Nevertheless, as the graph below depicts, Intel (INTC) has grown earnings at the above-average rate of 18.5%, which is more than twice as fast as the average company. Furthermore, Intel only has 4% debt on the balance sheet as compared to over 46% debt for the average company. So even with cyclicality that's similar to the S&P 500, Intel clearly represents an above average business. Microsoft Corp.  (MSFT) Our second example reviews Microsoft Corp.... Read more