Three Dividend Challengers Returning More Cash To Shareholders

Lam Research (LRCX) is a leading manufacturer, seller, and servicer of equipment for fabrication of semiconductors. The company’s equipment is used for plasma etch, thin film deposition, single-wafer clean, and mass metrology during the chipmaking process. The company’s equipment is used for fabrication of 3D NAND flash storage, advanced DRAM, logic chips, and other types of semiconductors. Lam has two subsidiaries that are Coventor and Silfex. Lam’s two major competitors are Applied Materials Inc (AMAT) and Tokyo Electron Limited (TOELF). The company had revenue of about $9.65B in FY 2019 down from $11.08B in FY 2018. Lam is a relative newcomer to the dividend growth world. The company only introduced a dividend in 2014. But since then the company has increased the dividend at a double-digit rate. The most recent increase was only 4.55% though to $4.60 per share annually giving a yield of 1.95%. The dividend is well covered by earnings with a current payout ratio is roughly 33.4% based on consensus 2019 EPS of $13.76. Similarly, the divided requires about $0.68B in FY 2019 and FCF was ~$2.87B giving a dividend-to-FCF ratio of approximately 23.7%. Both of these values are below my respective thresholds of 65% and 70%. Lam Research is also not that indebted with total debt of roughly $4.49B offset by cash, cash equivalents, and short-term investments of $5.43B. The debt-to-equity ratio is 0.95 and the interest coverage is over 21X. Overall, the dividend safety is important here since Lam Research’s end market of the semiconductor industry is very cyclical. There are periods of time where semiconductor and thus equipment is low. The industry is currently in a period of soft demand. From a valuation perspective the stock is trading at a forward P/E ratio of about, which is about equal to the 5-year average. I currently consider the stock to be fairly valued.

Royal Caribbean Cruises (RCL) is a leading operator of cruise lines. The company owns and operates major brands including Royal Caribbean International, Celebrity Cruises, Azamara Club Cruises, and Silversea Cruises. Royal Caribbean also has a 50% investment in a joint venture that operates TUI cruises and 49% stake in Pullmantur Cruceros, Spanish cruise line. The company is the second largest cruise operator in the world with over 60 cruise ships and over 130,000 berths. The company had 13 cruise ships on order at the end of June 2019. Royal Caribbean had revenue of roughly $9.49B in 2018. The company recently raised the annual dividend about 11% to $3.12 per share representing the 8th consecutive increase. The current yield is about 2.7% decently above the broader market average. Royal Caribbean’s divided is well covered with a payout ratio of 32.2%% based on the dividend and consensus 2019 EPS of $9.66. On a FCF basis the divided is more risky. Dividend coverage based on FCF is more volatile due to the capital intensive nature of cruise line industry and the requirement to purchase large ships. One risk is that the cruise line industry is in a period of robust expansion. If the global economy slows, the discretionary nature of cruising would lead to significant overcapacity. The stock is currently trading at a forward P/E ratio of ~11.9 well below the trailing 5-year average of 19.4. But note that the bottom line decreased significantly during the Great Recession and Royal Caribbean did not pay a dividend in 2009 and 2010.

Logitech International S.A. (LOGI) designs, manufactures, and sells computer, video game, and streaming music peripherals. The company’s products include mice, track balls, keyboards, gaming controllers, speakers, webcams, headsets, remote controls, and more. The company is headquartered in Switzerland. U.S. investors can purchase shares listed on the NASDAQ. The current market capitalization is about $7B. Logitech recently raised the dividend ~11.1% to $0.745 per share annually giving a forward dividend yield of about 1.76%. This is 5th straight increase. Logitech’s dividend is decently covered at a payout ratio of 34.7% base on the forward dividend and consensus FY 2020 EPS of $2.15. On a FCF basis, the dividend is also well covered. The dividend required about $114M in cash in FY 2019 and FCF was roughly $270M giving a dividend-to-FCF ratio of 42%. The company has no long-term debt and approximately $600M in cash, cash equivalents, and shot-term investments. The stock is probably fairly valued as it is trading at a forward P/E ratio of about 27 relative to a 5-year average of 30.4. Note that the dividend is only paid once per year in Q3.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s