The technology sector has become a great place to look for dividend stocks, as the 3.2% average yield offered by companies in this sector is more than double the S&P 500’s average dividend yield of 1.5%.
What’s more, dividend-paying technology companies offer investors the potential to benefit from fast-growing trends and the associated stock price upside. This is why we are going to take a closer look at…
Applied Materials could give its dividend a nice hike next year
Applied Materials’ 1.65% forward dividend yield might be lower than the technology sector’s average, but there’s a lot to like about the company. First, the stock has shot up over 50% so far in 2019 despite a muted financial performance lately, which shows its resilience and investors’ faith in the company’s long-term prospects.
The rally doesn’t seem to be misplaced as it is a solid bet on the rise of the semiconductor industry. It supplies chip fabrication equipment to semiconductor companies, so the demand for its products stands to rise in the future on the back of emerging technology trends — 5G networks, the Internet of Things, artificial intelligence, and autonomous driving, among others — that will create the need for more complex chips.
The semiconductor industry is going through a lean patch right now, but the company sees a turnaround taking place next year. CEO Gary Dickerson pointed this out on the latest earnings conference call: “Taking these factors into account, our view of overall wafer fab equipment spending for 2019 remains the same down mid-to-high teens on a percentage basis relative to last year. We see 2020 is a more positive set up for the industry in Applied with the start of a recovery and memory investment and sustained strength in foundry logic spending.”
The next reason to buy Applied Materials is valuation. Despite the rally, the stock continues to trade at an affordable valuation. Its trailing price-to-earnings (P/E) ratio of 15.7 is lower than the company’s five-year average multiple of 18. So, now would be a good time to go long on the stock as a turnaround next year could encourage the company to give its dividend a nice bump.
I’m saying that because Applied Materials had doubled its quarterly dividend payout in early 2018 thanks to a favorable financial performance and its tradition of returning around 90% of the free cash flow back to investors. It has stuck to that tradition despite a fall in its free cash flow over the past year, having returned $724 million to shareholders (share repurchases and dividend payments combined) in the fiscal third quarter when its free cash flow came in at $694 million.
Applied Materials’ dividend payout was $196 million during the quarter, which was 27% of its free cash flow. Adjusted net income was $692 million in the third quarter. This tells us that Applied Materials treads on the side of conservatism when it comes to the dividend payout, so it has the space to increase the dividend.
What’s more, the recent uptrend in Applied Materials’ free cash flow is likely to continue into the next fiscal year thanks to the turnaround that both the company and Wall Street are expecting. Analyst estimates compiled by Yahoo! Finance tell us that Applied Materials’ top line could jump 7% next year after a double-digit decline in 2019. Its EPS is estimated to jump from $3 this year to $3.35 next year.
Thus, don’t be surprised to see the company give its dividend a bigger bump in 2020 as compared to the 5% increase it announced earlier this year…
Continue reading at THE MOTLEY FOOL