Please ensure Javascript is enabled for purposes of website accessibility

3 Reasons NVIDIA Should Raise Its Dividend

By Leo Sun – Nov 20, 2018 at 8:00AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The chipmaker can afford to pay a much higher yield.

Shares of NVIDIA (NVDA 8.24%) plunged nearly 20% on Nov. 16 after the chipmaker posted its first revenue miss in three years and offered weak guidance for the fourth quarter. Its revenue rose 21% annually to $3.18 billion, but missed estimates by $60 million, representing the company's slowest growth in over two years. Its non-GAAP EPS rose 38% to $1.84, beating expectations by $0.13.

For the fourth quarter NVIDIA expects its revenue to fall 7% annually at the midpoint, compared to expectations for 17% growth. NVIDIA attributed the shocking miss to the end of the cryptocurrency mining boom and a higher inventory of mid-range Pascal GPUs throttling its core gaming revenues, which rose 13% annually but slipped 2% sequentially.

A businessman "holds" a chart of rising dividends.

Image source: Getty Images.

As a consolation prize, NVIDIA raised its quarterly dividend 7% to $0.16 per share, which equals a forward yield of 0.4%. That's an anemic payout compared to chipmakers like Intel (INTC 4.05%) and Texas Instruments (TXN 4.32%), which pay forward yields of 2.5% and 3.3%, respectively. I think NVIDIA can afford to boost its yield to comparable levels for three simple reasons.

1. A ridiculously low payout ratio

Analysts expect NVIDIA to generate $7.36 in earnings per share this year (which ends on Jan. 28). It paid out $0.45 per share over the past three quarters, and its latest dividend hike will boost its annual payout to $0.61 per share -- or just 8% of its estimated earnings for the year.

For comparison, Intel and Texas Instruments paid out 36% and 52% of their earnings, respectively, over the past 12 months. If NVIDIA paid out 50% of its earnings as dividends instead, its forward yield would jump to 2.2% -- which might make the stock more appealing to income investors.

2. A good dividend beats a bad buyback

NVIDIA clearly favors stock buybacks over dividends. During the first nine months of fiscal 2019, it spent $855 million on buybacks but just $273 million on dividends. It also authorized an additional $7 billion in buybacks, bringing its total authorization to $7.94 billion through Dec. 2022.

However, NVIDIA's stock declined 15% this year, indicating that its buybacks were poorly timed. There were already plenty of red flags -- NVIDIA's stock was at historical highs, its PE ratio hovered in the 40s and 50s for most of the year, the crypto boom seemed dangerous for inventories and year-over-year comparisons, and the semiconductor market was facing a cyclical decline.

Physical bitcoins.

Image source: Getty Images.

Therefore, it was reckless and wasteful for NVIDIA to buy back its shares, and that cash would have been better allocated toward bigger dividends.

3. The days of easy growth are over

NVIDIA's stock rallied over 80% in 2017 on three main tailwinds: new high-end games and crypto miners simultaneously boosting GPU demand, connected cars and the Nintendo Switch lifting sales of its Tegra CPUs, and companies buying its high-end data center GPUs for machine learning and AI tasks.

However, all of those tailwinds are now becoming headwinds. Waning interest in crypto mining, exacerbated by competition from ASIC-based miners, is flooding the market with cheap GPUs. Many gamers already upgraded their PCs, and sales of the Nintendo Switch are slowing down.

Some analysts are questioning long-term growth forecasts for driverless cars after a series of accidents, and NVIDIA faces escalating competition in the automotive market from rivals like Intel and NXP Semiconductors. Recent privacy debacles and algorithmic issues at tech giants like Facebook raise serious concerns about the rush to automate tasks with AI solutions. Its OEM and IP business also lost $66 million in quarterly revenues after the expiration of its cross-licensing deal with Intel last year.

The revenue growth from NVIDIA's main end markets in recent quarters tells a clear story: The days of easy growth are over, and investors should brace for a rough ride next year.


Q4 2018

Q1 2019

Q2 2019

Q3 2019






Professional Visualization





Data center










OEM and IP










YOY revenue growth. Source: NVIDIA quarterly reports.

It's time to reward patient investors

NVIDIA should be fine over the long term after it moves past the near-term volatility of the crypto market, stabilizes its inventories again, and launches new products. But even NVIDIA admits that it could take one or two quarters for its gaming business to stabilize, and the stock should remain under pressure until that happens. If NVIDIA significantly raises its dividend, it could lock in existing investors and attract new ones -- which would stabilize its stock more effectively than poorly timed buybacks.

Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Nvidia. The Motley Fool owns shares of Texas Instruments. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Nearly 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Nvidia Stock Quote
$169.23 (8.24%) $12.88
Texas Instruments Stock Quote
Texas Instruments
$180.46 (4.32%) $7.48
Intel Stock Quote
$30.07 (4.05%) $1.17

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/01/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.