If recent developments are any indication, the U.S.-China trade war is unlikely to be resolved anytime soon. Last week, the Trump administration labelled China a “currency manipulator” after its central bank allowed the yuan renminbi to slide to 11-year lows against the dollar. The People’s Bank of China (PBOC) let the yuan slide by as much as 1.9% on Aug. 5, mere days after President Trump announced new tariffs on $300 billion worth of Chinese goods.
The ensuing stock-market selloff sent a clear signal that the trade war is causing investors to flee riskier assets. Once again, technology stocks were disproportionately affected.
Investors wishing to maintain exposure to the technology sector amid the latest tariff spat should keep tabs on the following stocks:
- Market cap: $1.05 trillion
- Annual revenue growth: 14% (2019)
- Free cash flow: $38.26 billion
- Dividend yield: 1.34%
There’s a good reason why Microsoft is the world’s most valuable company. The software giant has made a habit of smashing earnings and revenue estimates thanks to its booming cloud business. By the end of 2018, Microsoft Azure had a 16.5% share of the cloud cloud infrastructure market. Unlike other big-name tech stocks, Microsoft has negligible exposure to China and operates in an industry (enterprise software) that is less impacted by tariffs than, say, semiconductors.
Microsoft has the added benefit of being one of the best dividend plays in the technology sector. Its current yield of 1.34% is not only higher than the sector average, payouts to shareholders have increased in each of the past 15 years.
- Market cap: $125.5 billion
- Annual revenue growth: 26% (2019)
- Free cash flow: $2.8 billion
- Dividend yield: N/A
Like Microsoft, Salesforce is part of an industry that is largely insulated from trade-war hostilities. The customer relationship platform has grown its revenues every year since the financial crisis, and has seen its sales double over the past three years. Salesforce has a strong penchant of making big-name acquisitions, which has allowed it to expand rapidly since 2013.
The trade-war hedge isn’t without its risks. CRM stock has lagged considerably behind the broader market this year. Although the company smashed earnings estimates for fiscal 2019, it issued weaker than expected guidance that seems to have turned investors off.
- Market cap: $30 billion
- Annual revenue growth: 11.5% (2019)
- Free cash flow: $1.12 billion
- Dividend yield: 2.97%
Paychex, a digital payroll and HR solutions provider, is the smallest company on this list. While it may lack the brand recognition of Microsoft or Salesforce, it enjoys one distinct advantage vis-a-vis a trade war: 100% of its sales come from the United States.
PAYX is up nearly 28% this year thanks to solid revenue growth and steady profitability. The company has been a solid dividend payer for the past eight years, and currently yields 2.96%. Paychex’s dividends are covered by profits and cash flow, which is a sign of sustainability. Another sign of sustainability is the fact that Paychex is operating in one of the longest labour market expansions in U.S. history. For a company that relies on payroll services, that’s got to mean something.
Disclaimer: Author holds no investment position in Microsoft, Salesforce and Paychex at the time of writing.