There's a lot to like about NVIDIA (NVDA -1.16%). The graphics specialist has been clocking blistering growth quarter after quarter, thanks to solid demand for its chips across several verticals such as PC gaming, self-driving cars, virtual reality, and cloud computing. However, the company dividend is one area in which NVIDIA lacks big-time.
A big miser
NVIDIA's dividend yield is a paltry 0.22% at the current stock price, much lower than the tech sector's average dividend yield of 1.11%. Some might argue that the company's dividend yield has declined thanks to its rapid stock price appreciation; the stock has shot up more than 1,700% since it started paying a dividend in late 2012.
But this can't be an excuse, as NVIDIA's earnings and free cash flow have increased tremendously over the years, and it has also done well to keep expenses in check.
NVIDIA has been extremely miserly on the dividend front. Its quarterly payout was $0.075 per share when it started paying a dividend six years ago, which has now increased to just $0.15 per share. That's because the chipmaker raises its dividend at an extremely slow pace. It boosted the payout by just 7% in November 2017, when it was paying a quarterly dividend of $0.14 per share.
So, NVIDIA added just a cent to the quarterly dividend despite recording massive earnings growth on a regular basis quarter after quarter. Of course, NVIDIA is still a growth stock pursuing opportunities in the fields of artificial intelligence and self-driving cars, so it makes sense for the company to preserve cash to take on any potential threats that arise. But there's enough money for that and a boosted dividend.
With a net cash position of nearly $6 billion and strong earnings power, NVIDIA could easily hike its dividend.
Why NVIDIA can easily pay a higher dividend
NVIDIA generated $2.3 billion in net income during the first six months of the current fiscal year and paid just $182 million in dividends, so it didn't spend even 8% of its earnings on the dividend. Meanwhile, it has generated $2.1 billion in free cash flow over the same period, so it isn't spending much of the free cash flow on the dividend, either.
Taking out the $655 million worth of share repurchases that NVIDIA made in the first half of the current fiscal year, as well as the dividends paid, it was still left with nearly $1.3 billion in free cash flow. NVIDIA wouldn't have to break a sweat even if it tripled the dividend. For instance, if NVIDIA started paying an annual dividend of $1.80 per share, its annual dividend outlay would be just over $1 billion and the forward dividend yield would rise to 0.67%.
The company could easily cover this level of dividend with the free cash flow that it has generated in just the first half of the current fiscal year, and still have a lot left that it could use for expansion, debt reduction, or any other purpose it deems fit. What's more, NVIDIA is in a solid position to keep improving its earnings and free cash flow thanks to the solid catalysts it is sitting on.
Should NVIDIA raise its dividend?
PC gaming supplies the majority of NVIDIA's revenue. This business supplied nearly 58% of its revenue last quarter and shot up 52% year over year. It is quite likely that this business will keep growing at an impressive pace thanks to NVIDIA's dominance, as it controls nearly 70% of the discrete GPU (graphics processing unit) market.
Similarly, NVIDIA's data center business has the potential to keep growing at a blistering pace because of the rapid expansion of the total addressable market. NVIDIA keeps upgrading its offerings to stay on top of the game in these fast-growing markets, and despite that, it has been able to keep its costs under control.
The company has been able to successfully counter the competition over the years and has created a solid position for itself in markets where it plies its trade. As such, NVIDIA shouldn't have much difficulty in raising its dividend, because even after doing so, it will have enough money in the bank to counter any potential threat.