While a number of big semiconductor names are inclined to garner all the AI headlines, the growing AI buildout is benefiting the complete chip production ecosystem.
That features semiconductor equipment stocks, tasked with making more volumes of increasingly complex chips. Amid high demand for more complex chips, revenue and profit are sure to flow to those firms.
That is happening to 1 semi-cap equipment leader, which just announced a 15% increase to its quarterly payout.
Lam Research is gushing money and poised for growth
Chip manufacturing giant Lam Research (NASDAQ: LRCX) is considered one of only a number of major players in crucial etch and deposition steps of the chipmaking process. Particularly, Lam makes a speciality of equipment used to stack chip components in a vertical manner. That benefited the corporate when NAND flash went from planar structures to stacked 3D structures a decade ago. Fortunately for Lam, each high-bandwidth DRAM memory and advanced logic chips are actually implementing more 3D structures. And much more fortunately, DRAM and advanced logic is where the majority of AI-related growth is today.
On the recent conference call with analysts, management highlighted several latest products which supply advanced etching capabilities for brand spanking new complex vertical structures for AI. CEO Tim Archer noted: “Overall, etch and deposition have gotten increasingly critical to addressing the complex semiconductor requirements of a growing AI environment. We’re excited by the breadth of opportunities we see ahead for the corporate, especially those created by technology inflections to gate-all-around, backside power delivery, advanced packaging, and dry EUV resist processing.”
AI-fueled growth is profitable for Lam, too
What’s especially positive about Lam’s growth is that it also comes with high margin and money flow, which fuels the corporate’s growing dividend. Over the past 12 months, Lam achieved a formidable 30% operating margin and 45% return on equity. The margin is bolstered by Lam’s technological moat, and the proven fact that it has limited competition, mainly just from Applied Materials (NASDAQ: AMAT). Each Lam and Applied have similar metrics, showing rational pricing. Thus, it’s no surprise that Applied can be a terrific dividend growth stock.
Last Thursday, Aug. 29, Lam announced it could be raising its quarterly payout by 15%, from $2.00 to $2.30, good for a $9.20 annual dividend. That is a yield of about 1.12% at the present stock price.
While a 1.12% yield may not appear to be much today, the 15% increase is a promising sign. If an organization has the capability to boost its dividend above the speed of inflation for long periods, that stock might be an important long-term holding to supply hefty retirement income well into the long run.
Lam’s payout could grow double digits for years
Like Applied, Lam has a low payout ratio of just 27.6%, meaning it pays out just over 1 / 4 of its net income as dividends. While not quite as little as Applied’s 15% payout ratio, it’s still a fairly low ratio, with ample room to extend. Furthermore, Lam’s current dividend yield is higher than Applied’s at 0.83%.
Lam’s earnings may be more cyclically depressed now. While Lam has displayed excellent long-term growth over time, it’s just now poised to return out of recent cyclical dip. Meanwhile, Applied has had steadier earnings grower. The difference probably lies in Lam’s outsize exposure to NAND flash investment, which has been paltry in recent times following the pandemic.
But when Lam and Applied have similar long-term growth prospects, Lam’s earnings are more cyclically depressed and will bounce back harder. In any case, the NAND recovery hasn’t happened yet, in order Lam experiences a NAND recovery combined with latest AI growth opportunities in DRAM and advanced logic, its normalized earnings should go higher.
Meaning Lam’s higher payout ratio could be lower on more normalized, through-cycle earnings.
Share repurchases add fuel to the hearth
Also like Applied, Lam is returning even extra cash to shareholders beyond the dividend through share repurchases. Last quarter, Lam repurchased $373.5 million, greater than the $261.4 million paid out as dividends. And Lam has been much more aggressive with repurchases previously when its share price was lower. As an example, it repurchased $980 million in stock within the June 2023 quarter.
That is good capital allocation right there, and is how Lam managed to lower its share count by over 10% since late 2019, all while maintaining a cash-rich balance sheet of $5.85 billion in money against just $4.98 billion in debt.
In sum, an organization with growing earnings, a declining share count, and a low payout ratio is a terrific recipe for a number of dividend per share growth in future. Like peer Applied Materials, Lam is poised to deliver just that within the years ahead, especially with AI tailwinds at its back.
Do you have to invest $1,000 in Lam Research straight away?
Before you purchase stock in Lam Research, consider this:
The Motley Idiot Stock Advisor analyst team just identified what they imagine are the 10 best stocks for investors to purchase now… and Lam Research wasn’t considered one of them. The ten stocks that made the cut could produce monster returns in the approaching years.
Consider when Nvidia made this list on April 15, 2005… when you invested $1,000 on the time of our advice, you’d have $731,449!*
Stock Advisor provides investors with an easy-to-follow blueprint for fulfillment, including guidance on constructing a portfolio, regular updates from analysts, and two latest stock picks every month. The Stock Advisor service has greater than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of August 26, 2024
Billy Duberstein and/or his clients have positions in Applied Materials and Lam Research. The Motley Idiot has positions in and recommends Applied Materials and Lam Research. The Motley Idiot has a disclosure policy.
This AI Stock Just Raised Its Dividend by 15%, and Even More Passive Income Should Be Coming was originally published by The Motley Idiot