INVESTORS are drawn to technology stocks because of their bigger growth potential in an era of increasing digitisation, automation and artificial intelligence.
Dividends tend to be secondary as, historically, technology companies are expected to reinvest their earnings into growth initiatives to drive further expansion.
A closer look at Bursa Malaysia reveals that there are a handful of tech or tech-related stocks that offer higher yields, particularly now that fixed deposit rates are measly following the central bank’s paring of the overnight policy rate to a 10-year low of 2%.
The stocks include Rexit Bhd, which offers an attractive dividend yield of 5.1%, VSTECS Bhd (4.2%), Diversified Gateway Solutions Bhd (3.8%), Globetronics Technology Bhd (3.5%), Elsoft Research (3.4%), JCBNEXT Bhd (3.2%), MMS Ventures Bhd (3.1%), Willowglen MSC Bhd (3%) and Unisem (M) Bhd (3%). We look at some of the counters in the sidebar below.
The head of research of a foreign research house says investors are usually drawn to tech stocks for their growth potential but notes that some of these counters also offer decent dividends.
“Investors generally buy technology stocks for growth but yes, there is a dividend angle to it too. It boils down to what they want, and their risk appetite. If investors want to have exposure to the technology sector and yet would like some form of dividend, they can consider such stocks,” she says.
However, she cautions that “investors should be aware of the volatility that comes with the sector” as well as how drastic the change in the business operating environment has been during the Covid-19 pandemic.
A head of investment at a local fund points out: “If you look back, historically, a number of technology companies did not pay dividends because they believed it would send a signal to the market that they did not have any new exciting initiatives to drive further growth.”
“However, after some stumbles on their ‘growth at all cost’ strategy, there are technology businesses that are looking to project themselves as more sustainable in terms of their bottom line,” he adds.
Jonathan Curtis, vice-president of Franklin Equity Group at Franklin Templeton Investments, believes that it is crucial to invest in technology companies that have strong business models, strong management teams and good financial strength evidenced by already strong margins when growth slows.
“When we think about growth, we are always trying to figure out how big these businesses will look like at maturity, when they are no longer in the hyper-growth stage. We want to own companies that have multiple avenues for sustainable growth,” he pointed out during a webinar session entitled “Tech Sector in the Post Pandemic World” last Tuesday. He added that his outfit will not look at companies that are one-hit wonders.
Curtis said the technology sector will see “powerful acceleration” growth in both revenue and earnings. The sector is “nowhere near 1999/2000 when there was a tech bubble”, he said, and remains optimistic on its growth.
“While absolute valuations are elevated, how much more the tech sector is trading versus the S&P 500 is only at a modest premium. It was at an 8% premium on Tuesday. We think the premium is warranted, given the strong growth sector.
“The technology sector is the third-most profitable in the S&P 500 and it is one of the few sectors that is net cash positive. That matters at times like these, when there is so much volatility. You want companies to have a good balance sheet,” he adds.
Worth a second look
Rexit has been paying annual dividends since its listing in 2006. In FY2019, it paid a dividend of 3 sen per share.
Rexit focuses on delivering solutions and services to the financial services sector, particularly general insurance. The company offers several web-based insurance solutions that cater for front-end marketing and sales functions, as well as back-end operations and management requirements.
In FY2019, Rexit recorded a 4% year-on-year increase in revenue to RM22.72 million, including from the development, management and operations of the mySalam portal.
Profit before tax increased 2.34% to RM10.51 million while net profit increased marginally by 0.38% to RM7.89 million from RM7.86 in the previous year.
Rexit has cash and cash equivalents of RM29.45 million.
VSTECS has been distributing at least 30% of its net profit to shareholders. At its present price, the stock offers a dividend yield of 4.2%.
At the end of FY2019, VSTECS had improved its net cash position to RM71 million from RM54.5 million in the previous corresponding period.
In FY2019, it recorded a net profit of RM29.6 million on revenues of RM1.8 billion, representing y-o-y growth of 20.3% and 10.4% respectively. Its improved performance was driven by all three of its business segments — ICT distribution, enterprise systems and ICT services.
VSTECS distributes ICT products such as notebooks, personal computers, smartphones, tablets, wearables, printers, software, network and communication infrastructure, servers and enterprise software from more than 40 principals, including Hewlett Packard, Asus, Lenovo, Apple, Dell, Microsoft, Cisco, Samsung, VMWare and IBM.
At its current price, Globetronics’ dividend yield is 3.5%. Its dividends yields have ranged from 2.42% to 6.61% in the past five years.
The dividend payout ratio over net profits is considered high. In FY2015, 91% of its net profit was paid out as dividends, jumping to 252% a year later.
In FY2017, that figure slipped to 89% and in FY2018, to 82%.
In FY2019, Globetronics made three interim-dividend payouts totalling RM50.2 million, which translates into 112% of group net profit of RM44.7 million.
Globetronics is engaged in the manufacture, assembly, testing and sale of a variety of products that include integrated circuits, optoelectronic products, light emitting diode (LED) components and modules, sensors and optical products, electronics/semiconductor components as well as technical plating services.
Elsoft Research’s dividend payout ratios ranged from 56% to 81% between FY2014 and FY2018. In fact, its payouts have been on a noticeable upward trend.
Its dividend payout was 63% in FY2014, increasing to 56% (FY2015), 70% (FY2016) and 81% (FY2017). In FY2018, its payout was slightly lower at 77%.
But in FY2019, the company paid out more than its net profit of RM17.8 million, forking out a total of RM21.7 million in interim dividends.
Last Wednesday, Elsoft was trading at a yield of 3.4%.
In its 2018 annual report, the board said the company had adopted a dividend policy of paying not less than 40% of its annual net profit after taxation, so long as such distribution would not be detrimental to its cash flow requirements.
In the technology sector, Elsoft was the winner of The Edge Malaysia Centurion Club 2019 corporate award for the highest return on earnings over three financial years among companies with a market capitalisation of between RM100 million and RM1 billion.
The Penang-based tech company is involved in the research, design and development of test and burn-in systems as well as application-specific embedded systems.
Elsoft’s key products — test and burn-in systems — are used by its customers, who manufacture optoelectronic devices such as LED, image sensors and automotive lightings.
It remained in a net cash position of RM67.9 million as at FY2019, comprising RM10.4 million in cash and RM57.5 million in unit trust and bond funds as well as quoted shares.