Kulicke and Soffa Industries (NASDAQ:KLIC) is not a well-known company. The semiconductor packaging equipment specialist is valued at just $1.65 billion, and it recorded just $809 million of revenue last year. That's a much smaller number than those posted by semiconductor equipment giants like Applied Materials (NASDAQ:AMAT), KLA-Tencor (NASDAQ:KLAC), and Lam Research (NASDAQ:LRCX).

I've owned shares of Kulicke and Soffa for a few years, in part because the stock was cheap back in 2015, and in part because of a rock-solid balance sheet. At the end of the latest quarter, Kulicke and Soffa had $628 million of cash and investments and no debt, despite ongoing share buybacks.

The company is now getting more serious about returning some of that cash to shareholders. Kulicke and Soffa announced an expansion of its capital return program earlier this month, initiating a quarterly dividend of $0.12 per share. That puts the dividend yield at about 1.96%.

A roll of hundred dollar bills with a sign that reads Dividends.

Image source: Getty Images.

Increasing confidence

The semiconductor equipment industry is cyclical, and Kulicke and Soffa's revenue and profits can swing up and down depending on demand. In fiscal 2017, for example, Kulicke and Soffa posted a net income of $126 million, up from just $48 million in 2016.

But the company believes these swings will moderate in the future, thanks in part to diversification into product areas beyond the core wire bonding business. "The Company's diversification and growth has reduced volatility and increased earnings quality, enhancing our confidence as we look ahead. Our strong balance sheet, product positioning, ongoing development programs and M&A pipeline are anticipated to create additional growth opportunities into the future," said CEO Fusen Chen in the press release announcing the dividend.

When Kulicke and Soffa does face a bad year or two down the line, the balance sheet provides a giant cash cushion that will allow the company to keep paying the dividend. Based on the current share count, the dividend will eat up just $34 million each year. In the past 10 years, there have been only two years where the company's free cash flow was less than this new dividend payment: 2008 and 2009.

A solid dividend

Kulicke and Soffa doesn't sport the highest dividend yield among its peers, but a low payout ratio and a strong balance sheet make a dividend cut unlikely. Here's how the dividend compares to a few other semiconductor equipment dividends:

Company

Dividend Yield

Payout Ratio

Kulicke and Soffa

1.96%

27%

Applied Materials

1.71%

24.2%

KLA-Tencor

2.85%

50.9%

Lam Research

2.52%

46.6%

Dividend yield based on most recently announced dividend. Payout ratio based on fiscal 2017 net income. Date source: Morningstar.

In an industry where profits can fluctuate quite a bit from year to year, keeping the payout ratio low when times are good makes a dividend cut less likely when times are bad.

An attractive stock

Shares of Kulicke and Soffa have just about doubled over the past three years, but the stock is still attractively priced. If you back out the cash on the balance sheet, shares trade for just over 8 times 2017 earnings.

Because Kulicke and Soffa's earnings fluctuate, this ratio is a little deceptive. Realistically, the company's average earnings going forward will probably be lower than its earnings last year, given that 2017 was the most profitable year Kulicke and Soffa had seen since 2012. But even based on its average earnings over the past five years, the company's P/E ratio is still just 14.7 after backing out the cash.

With the initiation of a dividend, Kulicke and Soffa is now a solid dividend stock trading at a reasonable price. Growth won't come in a straight line, given the cyclical nature of the industry, but there's a lot to like for patient investors.

Timothy Green owns shares of Kulicke & Soffa Industries. The Motley Fool recommends Lam Research. The Motley Fool has a disclosure policy.