Many tech stocks surged over the past year as expectations for lower interest rates drove investors back toward higher-growth companies. But with the Nasdaq Composite now hovering near its all-time highs, investors should get picky with the stocks they buy.
So instead of chasing the highest-growth tech stocks, it might be prudent to check out the cheaper ones that pay higher dividends. These stalwarts should hold up well during a market downturn, and their dividends will become more appealing as interest rates decline. These three undervalued tech stocks still look like great buys in January: IBM (IBM -0.35%), AT&T (T -0.09%), and HP (HPQ -0.65%).
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1. IBM
For many years, IBM was a dusty old tech company with declining revenue and profits. Its core IT software and services business was shriveling, it struggled to keep pace with its nimbler cloud-based competitors, and it was more focused on divestment, cost-cutting measures, and desperate buybacks than finding fresh ways to grow again.
That all changed under Arvind Krishna, who took the helm as IBM's CEO in 2020. Under Krishna, IBM spun off its slow-growth managed IT infrastructure services business as Kyndryl and expanded its open-source subsidiary Red Hat's presence in the hybrid cloud and AI markets.
Those strategies paid off. From 2021 to 2023, IBM's revenue grew at a compound annual growth rate (CAGR) of 4%, as its earnings per share (EPS) rose at a CAGR of 13%. From 2023 to 2026, analysts expect its revenue and EPS to grow at a CAGR of 3% and 5%, respectively.
Those growth rates might not seem too impressive, but they represent a huge improvement from its declining sales and profits in previous years. IBM still looks cheap relative to many other tech stocks at 21 times forward earnings. It also pays a forward dividend yield of 3%, which could become even more attractive as fixed-income yields decline.
2. AT&T
AT&T was once considered a dying telecom company that had "di-worsified" its business with pricey media acquisitions. But in 2021 and 2022, it spun off DirecTV, Time Warner, and many of its smaller media assets to streamline its business.
By abandoning its quest to become the next Netflix, AT&T freed up more cash to expand its core 5G and fiber businesses. It also ensured that it had enough cash to cover its dividends, which currently sport a forward yield of 5%, and reduce its debt.
In 2023, AT&T generated $16.8 billion in free cash flow (FCF) as the net adds for its postpaid phone and fiber businesses grew by 1.7 million and 1.1 million, respectively. For 2024, it expects its annual FCF to grow to between $17 billion and $18 billion.
From 2023 to 2026, analysts expect AT&T's revenue and EPS to grow at a CAGR of 1% and 5%, respectively. Those growth rates seem sluggish, but its high yield and low valuation should make it a great safe haven play in this unpredictable market.
3. HP
HP, one of the world's leading producers of PCs and printers, suffered a major slowdown from fiscal 2022 through fiscal 2024 (which ended last October). Its sales slowed down after it lapped the pandemic-driven buying frenzy in consumer PCs and printers, and the macro headwinds throttled its sales of commercial products.
That pressure drove HP to cut costs and buy back more shares, but its EPS still dropped 14% in fiscal 2023. That decline was disappointing, but HP's business will likely recover as the PC market stabilizes and warms up again.
For now, it's focused on pruning its workforce, streamlining its PC portfolio with fewer models, launching more subscription services, and rolling out fresh products for higher-growth hybrid work, gaming, industrial graphics, and 3D printing markets.
From fiscal 2024 to 2027, analysts expect HP's revenue and EPS to grow at a CAGR of 2% and 9%, respectively, as those turnaround efforts kick in. Its stock looks cheap at just 10 times this year's earnings, and it pays an attractive forward dividend yield of 2.8%. It won't skyrocket anytime soon, but it could still be a great value stock for patient investors.
