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A Solid Dividend Stock to Buy in May

By Harsh Chauhan - May 23, 2020 at 10:45AM

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This semiconductor company is confident of delivering growth in a tough market.

Applied Materials (AMAT -1.63%) had to pull its quarterly guidance in March, as the novel coronavirus outbreak disrupted tech supply chains thanks to shelter-in-place orders and lockdowns initiated across the globe to contain the spread.

Not surprisingly, the company's fiscal second-quarter results were a mixed bag as revenue and earnings fell way short of Wall Street's expectations. The company said that COVID-19 created substantial challenges across its "supply chain, manufacturing operations and logistics," erasing nearly $650 million in potential sales in its semiconductor systems business during the quarter.

Despite these challenges, Applied Materials put up a solid performance and also met its dividend commitments at a time when several big names have been reducing or suspending payouts. Let's take a closer look at the reasons why Applied Materials could turn out to be a solid dividend stock right now.

Chalkboard with various finance related drawings and the word dividends

Image source: Getty Images.

Applied Materials' quarterly performance was resilient

Applied Materials' top line jumped 12% annually to $3.96 billion in the second quarter of fiscal 2020. The company's operating margin also increased by 1.7 percentage points over the prior-year period to 23.6%, while gross margin increased by a percentage point to 44.2%.

The jump in Applied Materials' revenue and the increment in its margins led to a 13% increase in the net income to $755 million, or $0.82 per share. Analysts were looking for $0.93 per share in earnings on revenue of $4.09 billion. But those Wall Street estimates shouldn't matter much, as Applied Materials continues to witness solid demand in its semiconductor equipment business that supplies nearly 65% of its total revenue.

The COVID-19 effects may have erased a substantial chunk of the semiconductor systems business last quarter, but it still grew 17% year over year. More importantly, CEO Gary Dickerson said on the latest earnings conference call that the company is entering the third quarter with "record orders and a record backlog for our semiconductor and service businesses combined."

Within the semiconductor systems business, demand for the company's foundry and memory equipment is on the rise as its customers continue to invest in factories to advance their development pipelines.

What's more, Taiwan Semiconductor Manufacturing's decision to build a $12 billion semiconductor fabrication plant in the U.S. from next year should further inflate Applied Materials' order book. That's because the company has been supplying chip-making equipment to TSMC for a long time.

In all, Applied Material sees double-digit growth in its semiconductor business this year, even after taking into account the negative effect of COVID-19 on its business. So, investors looking for a coronavirus-resistant pick should take a closer look at Applied Materials, as it is trading at a trailing price-to-earnings (P/E) ratio of 17.7, lower than last year's multiple of 21.3.

But Applied Materials' valuation and its financial growth in these trying times aren't the only reasons why you should be going long.

A robust dividend should ensure a steady income stream

Applied Materials has a forward annual dividend yield of 1.62% after it raised the payout by 5% in March this year. The company's "strong cash flow performance and ongoing commitment to return capital to shareholders" encouraged it to raise the dividend in these uncertain times.

In all, Applied Materials returned $392 million to shareholders during the quarter, of which $193 million was in the form of dividends. The company generated $635 million in operating cash flow during the quarter, and capital expenditure came in at $71 million, leaving it with a free cash flow of $564 million -- enough to cover the dividend payout and the repurchases.

Applied Materials' dividend payout ratio of less than 27% is also on the conservative side, indicating that the company should be able to maintain its payout even if things go south in the near term. That being said, investors shouldn't forget that the company's revenue and earnings could keep rising despite the effect of the novel coronavirus, given its strong order book and bright long-term prospects.

As such, investors looking for a semiconductor stock that could deliver a mix of growth as well as a steady stream of dividends amid the coronavirus pandemic might want to consider Applied Materials for their portfolios.

Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Taiwan Semiconductor Manufacturing. The Motley Fool recommends Applied Materials. The Motley Fool has a disclosure policy.

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Applied Materials, Inc. Stock Quote
Applied Materials, Inc.
AMAT
$107.83 (-1.63%) $-1.79

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