Get Paid While You Wait: 3 Most Important Dividend Stocks in Semiconductor Manufacturing


Sure, investors love their dividend-paying stocks, but the biggest market gains usually come from growth stocks, which reinvest all of their profits into big market opportunities.

But who said you have to choose? A fascinating industry today is semiconductor manufacturing, from companies that can be seen as “pickaxes and shovels” to the “gold rush” which is competition for advanced chips. .

Although semiconductors, and therefore their manufacturers, are viewed as cyclical businesses, in the long run their clear growth trend is upward and to the right. In fact, the semiconductor industry as measured by the IShares Semiconductor ETF (NASDAQ: SOXX) is up almost 2.7 times that of the entire S&P 500 over the past 10 years:

SPY 10-year total returns (daily) given by YCharts

Despite past good performance, chip-based technologies like artificial intelligence, 5G, and the Internet of Things aren’t slowing down anytime soon. Yet semiconductor manufacturing is becoming increasingly difficult and capital intensive, and the semiconductor industry has consolidated and matured.

This has led to big profit margins for major semi-equipment companies and foundries – enough to pay handsome dividends, while seizing growth opportunities at the same time. With this in mind, here are three big names in semi-cap equipment with growth avenues and high-growth dividends.

A machine engraves wafers on a printed circuit.

Image source: Getty Images.

Semiconductor manufacturing in Taiwan

Why not start with the world’s largest semiconductor manufacturing company, Semiconductor manufacturing in Taiwan (NYSE: TSM)? Taiwan Semi is not an equipment maker, but the world’s leading pure-play foundry, where other companies look to have their leading chips manufactured. Through its foundry-only business model, Taiwan Semi has recruited many of the world’s top technology companies to use TSM as its primary foundry. Gather expertise across many types of chips, Apple‘s (NASDAQ: AAPL) M1 chip to Qualcommcellular modems from NVIDIA GPU, Taiwan Semi has established itself not only as the largest but also the most efficient foundry in the world.

Taiwan overtook the first Intelligence (NASDAQ: INTC) in the race for a 7nm chip several years ago, and has only cemented and extended that lead. After its 5nm chips became the first iPhone 5G last year, Apple is already testing Taiwan Semi’s 3nm process, which is expected to be ready in 2022, according to the Nikkei Asia.

How dominant is TSMC? Even Intel is now sampling TSM’s 3nm process, although Intel competes with TSM in process technology and has ambitions to be a third-party foundry itself. Intel has just announced a new delay for its 10nm Sapphire Rapids server chip, which will now be ready in early 2022 rather than 2021. Intel’s 10nm process is roughly equivalent to Taiwan Semi’s 7nm. , but since TSM already manufactures 5nm and will soon have 3nm in production, Intel is falling even further behind. So even Intel will likely use TSM’s services as it seeks to reclaim lost market share against Advanced micro-systems, a TSM client, as it aims to catch up with its own capabilities.

While others like Intel are spending big to try to catch up, TSM recently announced its own three-year, $ 100 billion spending plan to consolidate its lead and meet growing demand for advanced chips. As a perspective, TSM spent $ 17.2 billion in capital spending last year, essentially doubling that number over the next three years. With so much spending, investors can be pretty confident that growth will follow. Meanwhile, TSM’s 1.5% dividend is expected to follow this long-term growth path along with both revenue and earnings.

A technician looks at a semiconductor with a magnifying glass.

Image source: Getty Images.

Lam Research

Taiwan Semi Foundry Filling Equipment is Lam Research (NASDAQ: LRCX), one of the few manufacturers of front-end semiconductor equipment with the technological capabilities to meet the industry’s most demanding demands. Lam’s expertise lies in engraving and depositing machines, serving both the logic and memory subsectors.

It should be noted in particular that Lam is a leader in machines for 3D stacking, a technological process that has started to be widely used in the NAND flash memory industry over the past five years. But Lam’s equipment is also important for logical production.

Additionally, with a large market share, Lam has compiled tons of data, which he can then infuse into his latest machines, giving them more automated and self-maintenance capabilities, and giving Lam the ability to sell. data-driven services to customers. that help them minimize defects and improve yields. Basically, the more machines he sells, the more data Lam collects about very precise and increasingly difficult manufacturing processes, which Lam can then turn into even better machines and new services.

While machine sales can be a bit spotty from quarter to quarter, services tend to grow steadily with its installed base. In the last quarter, services accounted for about a third of Lam’s revenue, which can go a long way to smooth the historic cyclicality.

With specialized and differentiated machines as well as high margin services, Lam is raking in huge profits, with operating margins of 30% and a massive return on equity of 70% based on the results of the last 12 months. While Lam’s dividend is only around 0.85% today, that dividend is covered five times by earnings, so it is almost certain that it will increase over the next several years. Lam also returns the remainder of his earnings in the form of share buybacks, for a total shareholder return of around 3.2% at today’s market price.

A printed circuit board with chips on it.

Image source: Getty Images.

Kulicke & Soffa Industries

While Lam Research manufactures front end equipment, Kulicke & Soffa (NASDAQ: KLIC) is a leader in the field of back-end equipment. The back-end equipment connects the chips together in advanced structures on a printed circuit board.

Moore’s Law, which is the principle that semiconductors double the amount of transistors they can install on a chip every one to two years, slows down, which means that advancements in front-end semiconductor processes also slow down. This lets the back-end equipment take over, plugging advanced chips, accelerators, and memory into more energy-efficient packages. Advanced packaging and assembly is set to become much bigger and more capital intensive in the age of 5G, Internet of Things and AI – and that means good things for Kulicke & Soffa.

In addition, Kulcike & Soffa has also developed machines for mini and microLED displays, a new type of display technology that is expected to supplant traditional OLED and LCD displays, at least to some extent. Apple’s new iPad Pro uses miniLED display technology, and other screen products like TVs and even phones may adopt miniLED in the future. K&S management predicts a whopping 200% annual growth rate of miniLED revenue through 2025. Although this is a small base, in the coming years, miniLED revenue could become an important new segment at K&S.

While Kulicke & Soffa shares have had a great year, up around 60%, they are actually down around 16% from all-time highs. It’s also the cheapest of the three stocks here, at just 11.5 times the estimated earnings of 2021. Like Lam, Kulicke & Soffa are paying a growing dividend, which is earning 1.1% today, but is coming from increase by 16.7% in December and is expected to continue in the future. Like Lam, K&S devotes even more of its return on capital to share buybacks and has reduced its number of shares by approximately 23% since 2015.

Semi-cap equipment names are some of the best combinations of growth and value

In the tech world, software names, FAANG names, and chip designers tend to gain more financial media attention and tend to come in at fairly high multiples. Still, investors shouldn’t overlook the less glamorous equipment stocks that power these trendy tech sectors. If you can handle some cyclicality and volatility, semi-cap equipment names offer investors some of the best combinations of dividends and long-term growth prospects today.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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