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This Dividend-Paying Tech Stock Just Raised Its Payout

By Harsh Chauhan – Aug 26, 2018 at 8:58AM

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An attractive yield and high-growth opportunities make this tech company worth a look.

Tech stocks usually don't pay rich dividends, as evident from the sector's lowly average dividend yield of just 1.1%. Maxim Integrated (MXIM), however, is one of the few companies in this sector that bucks the trend handsomely.

The company makes analog circuits used in consumer devices, data centers, and industrial applications, among others. Though it's not in a very fashionable business, Maxim's products play a critical role in powering electrical devices by enabling data transfer between different sensors. But what's really fashionable about Maxim is its solid dividend yield of over 3%, which easily puts the sector's average to shame and gives income-oriented investors a great option to tap into emerging tech trends.

The word "Dividends" written on a blackboard with other doodles drawn around it.

Image Source: Getty Images.

How sustainable is the dividend?

Maxim has been paying a dividend for 15 years and recently raised the quarterly payout by 10% to $0.46 per share. As it turns out, the company has consistently increased its dividend every year since 2010, and it looks well placed to keep up the trend in the future thanks to a manageable payout ratio of about 60%.

This might seem on the high side considering that a semiconductor titan such as Intel pays out closer to 40% of its earnings in the form of a dividend. But investors shouldn't miss the fact that Maxim is focused on returning all of its free cash flow to shareholders through dividends and buybacks.

The company generated $932 million in free cash flow last fiscal year (excluding a one-time payment of $178 million to the IRS), $438 million of which was returned to investors through dividends. By comparison, it bought back $408 million of shares. So 47% of Maxim's free cash flow is going out in the form of a dividend -- a more manageable figure. More importantly, the company has consistently grown its free cash flow over the past five years.

MXIM Free Cash Flow (TTM) Chart

Data by YCharts.

Recall that the dip you see in 2018 above is due to that one-time IRS payment. Maxim's ability to sustain its dividend depends on its ability to increase free cash flow, and that, in turn, depends on its earnings power.

The good part: Maxim is going after lucrative markets that helped it boost earnings per share (excluding special items) by 28% in fiscal 2018.

Pulling the right strings

I already mentioned that Maxim's chips are used in various verticals, but the company is looking to tap into areas that will allow it to outgrow the broader semiconductor market. Automotive is one such niche, where the chipmaker has struck partnerships with several companies, including NVIDIA, to sell its connectivity chips. What's more, Maxim is expanding its automotive alliance -- the company announced a partnership last month to develop in-car infotainment systems with Qualcomm, which has been making impressive progress in connected and self-driving cars.

German auto giant Volkswagen, for instance, has decided to use Qualcomm's Snapdragon 820 chipset to power its infotainment systems. Automotive software specialist BlackBerry has also decided to rely on Qualcomm hardware for powering infotainment systems and cockpit controllers.

Maxim can get access to these Qualcomm partners, as some of its chips now support the Snapdragon 820 automotive platform. More specifically, Maxim's power management and USB charging solutions, as well as other connectivity solutions, are now optimized to work with Qualcomm's automotive chips.

The company is now in a stronger position to take advantage of the in-vehicle market, which is expected to double in size over the next five years. The automotive business already makes up 22% of Maxim's total revenue.

But this doesn't mean the company is ignoring other opportunities. Allied Market Research estimates that sales of wearable fitness devices will grow at almost 20% annually for the next six years. To attack this space, Maxim has also launched a couple platforms that will help device makers accelerate their time to market.

Such moves are probably the reason Maxim's top-line growth is starting to pick up the pace. The company expects a 10% year-over-year jump in the revenue this quarter, up from the 5% growth it clocked last quarter.

All set to level up

Maxim's move to diversify its customer base and venture into fast-growing markets should improve its earnings power going forward. Not surprisingly, consensus estimates suggest that its earnings could grow at almost 14% per year for the next five years. Combine that with its budding track record as a dividend payer, and Maxim makes for an interesting prospect to both income and growth investors.

Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Nvidia. The Motley Fool owns shares of Qualcomm. The Motley Fool recommends BlackBerry. The Motley Fool has a disclosure policy.

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