[cnxvideo id=”655416″ placement=”ros”]When you think of stocks to buy for dividends and total return, probably one of the last groups you would think about it is semiconductors. While there are many reasons to own them in addition to the cyclical, secular and consolidation tailwind the group has now, you can add a fourth, and that is dividend growth.
A new Merrill Lynch report from outstanding analyst Vivek Arya makes the case that the large cap semiconductor stocks in the S&P 500 could average 2% or more dividend yield and an astonishing 13% annualized dividend growth over the next few years, which may be the fastest among all the sectors in the venerable index.
Four stocks that have been absolutely on a tear the last year are rated Buy and lead the projected three-year dividend growth estimates. While more suited for aggressive growth accounts, they all have bright futures.
Broadcom
This stock has been on a roll over the past year and is expected to trade even higher. Broadcom Ltd. (NASDAQ: AVGO) is a leading designer, developer and global supplier of a broad range of analog and digital semiconductor connectivity solutions. Its extensive product portfolio serves four primary end markets: wired infrastructure, wireless communications, enterprise storage and industrial and other.
Applications for the company’s products in these end markets include data center networking, home connectivity, broadband access, telecommunications equipment, smartphones and base stations, data center servers and storage, factory automation, power generation and alternative energy systems and displays.
The company produces radio frequency (RF) front-end for LTE-enabled Apple products. Wall Street estimates that the company does 15% of its total business with Apple. Top Wall Street analysts like the leadership in the mobile, data center and broadband markets, and especially in the RF arena. Many on Wall Street see a cyclical rebound in industrial and communications demand.
Top analysts on Wall Street think the Brocade acquisition could be materially accretive to Broadcom earnings once the deal closes in late 2017. While purchase accounting rules, acquisition and restructuring costs, and potential divestitures could muddle Brocade’s contribution to Broadcom during the first year after the deal closes, on a normalized run-rate basis, some estimate that Brocade would contribute $1.40 or so to Broadcom’s earnings per share in calendar year 2018, estimated when the $250 million in run-rate synergies are fully achieved, resulting in about 10% accretion to current earnings per shares estimates.
Broadcom continues to exemplify the industrialization of semis theme and many on Wall Street expect potential acquirers to outperform as they consolidate the cost base in the still-too-fragmented semi industry. Despite recently doubling its dividend and raising its dividend payout ratio target to 50%, many believe the company’s cash flow can continue to fund meaningful acquisitions.
Investors receive a 2.06% dividend. Merrill Lynch raised its price target to $250 from $215. The Wall Street consensus target is $212.97. The shares closed yesterday at $202.48.
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Texas Instruments
This old-school chip tech company has come back into favor big-time. Texas Instruments Inc. (NASDAQ: TXN) is a global semiconductor design and manufacturing company that develops analog integrated circuits and embedded processors. The company generates 80% to 90% of its revenues from its analog and embedded processing businesses, which have well-diversified end-markets (autos, industrial, personal/consumer electronics), long product life cycles and limited capital intensity. The company has 6% market share of the auto chip market.
Texas Instruments reported fourth-quarter revenues of $3.41 billion, which were down 7.1% sequentially but up 7.1% year over year (within the guidance range of $3.17 billion and $3.43 billion) and ahead of the consensus estimate by 3.2%. On a GAAP basis, the company reported net profit of $1.02 a share, compared with a net profit of $0.94 in the previous quarter and a net profit of $0.80 in the comparable prior-year quarter.
Merrill Lynch sees a potential 15% to 22% earnings upside potential if the company’s corporate tax rate would drop to the Trump administration proposed 15% to 20% level.
Investors receive a 2.55% dividend with the new increase. The Merrill Lynch price target for the stock is $92, while the consensus price objective is $76.54. The shares closed Wednesday at $78.58.
NVIDIA
This top chip stock reported strong earnings all last year, and it was the top performing stock in the S&P 500. NVIDIA Corp. (NASDAQ: NVDA) is one of the leaders when it comes to supplying graphics processing technology for the 3D graphics market, including desktop graphics processors and gaming consoles.
NVIDIA is also moving into visual computing chips for cars, mobile devices and supercomputers. The company has been able to use its ability to leverage past investments, with a more controlled spending structure ahead on unified, which enables strong cash flow that is allowing a focus on capital return, which is currently estimated to be $1 billion next year.
Top analysts feel the stock is maturing to a platform company from a pure chip company, and many agree that the stock should continue to benefit from four secular trends: virtual reality, PC gaming, chips in the automobile industry and graphic processing units in the cloud.
The company reported incredible quarterly numbers in November, and forward guidance also came in to the upside. Revenues beat consensus estimates by 19%. Core gaming grew 62%, but data center grew 193% and autos grew 61%, and the latter two now account for 18% of growth, a significant amount but a number that could get much bigger.
Merrill Lynch gives the company a premium multiple due to its projected long-term earnings growth rate, and the firm also sees the dividend growing 16.4% over the next three years.
Investors receive a 0.52% dividend. Merrill Lynch has a $125 price target. The consensus target is $99.67, but shares closed yesterday at $107.79.
Skyworks Solutions
This company has really rolled over from highs printed last summer and could be ready for a big move higher. Skyworks Solutions Inc. (NASDAQ: SWKS) designs, develops, manufactures and markets proprietary semiconductor products, including intellectual property worldwide.
The product portfolio includes amplifiers, attenuators, battery chargers, circulators, DC/DC converters, demodulators, detectors, diodes, directional couplers, diversity receive modules, filters, front-end modules, hybrids, LED drivers, low noise amplifiers, mixers, modulators, optocouplers/optoisolators, phase shifters, phase locked loops, power dividers/combiners, receivers, switches, synthesizers, technical ceramics, VCOS/synthesizers and voltage regulators.
Last year there was some hot chatter that the company made an offer to buy Microsemi, which offers a comprehensive portfolio of semiconductor and system solutions for communications, defense and security, aerospace and industrial markets. The results of the potential deal remain to be seen.
The analysts see three-year dividend growth of a solid 10.1%. Investors currently receive a 1.22% dividend. The Merrill Lynch price objective is $96, and the consensus target is $93. Shares closed yesterday near those levels at $91.87.
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While these are outstanding companies, their stocks are also very expensive at current levels. It may be prudent to buy a small position here, and more aggressive accounts could sell puts at lower levels, hoping for a pullback.
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