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Will Micron Technology's New Dividend Policy Pay Dividends For Investors?

By Anders Bylund – Aug 4, 2021 at 6:17AM

Key Points

  • The semiconductor company just announced a modest quarterly dividend.
  • Micron hasn’t had an active dividend policy since 1996.
  • The company also runs a serious share buyback policy.

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Relax -- this surprising announcement is not the end of Micron's growth ambitions.

Memory-chip maker Micron Technology (MU -4.55%) just announced a quarterly dividend policy. The payouts are starting out small, but I expect the company to build up its dividend yield over time. Let's see what Micron's payouts will mean to us shareholders.

What's new?

Micron declared a quarterly dividend of $0.10 per share on Monday evening. The first payout will arrive on Oct. 18, payable to shareholders of record as of Oct. 1.

Assuming that the next three payouts will hold steady at this level, that works out to a 0.5% annualized yield at current share prices. Micron will spend approximately $115 million on dividend checks in the third quarter, or $460 million in the first year.

A stack of hundred-dollar bills resting on a calendar, next to a fountain pen and a credit card.

Image source: Getty Images.

The company will finance this policy directly from its free cash flows, which added up to $1.5 billion in the recently reported third quarter. Furthermore, Micron boosted its capital expense budget on the back of strong third-quarter results. We are looking at the start of a whole new era in Micron's cash management strategy.

Micron's credit ratings have been parked in investment-grade territory since memory chip prices firmed up in 2018. Credit rating firms tipped their hats to management's ambitious capital allocation plans. The dividend policy will stress Micron's finances, but strong market trends should keep the payout budget well within the company's cash flow coverage.

What's the big idea?

Solid unit pricing and growing demand for memory chips have turned Micron into a cash machine in recent years. That's why the company is revamping its cash management policies.

Buybacks make a lot of sense when Micron's stock trades at bargain-bin valuations, as it often did between 2014 and 2019. Market makers have finally caught on to the fact that the memory chip sector isn't teetering on the edge of another massive oversupply situation, so the price-to-earnings ratio has stabilized at a more reasonable double-digit level. Under these circumstances, dividends can be a better tool for returning excess cash to shareholders.

Smiling businessman holds up a calculator where the digits window reads DIVIDENDS.

Image source: Getty Images.

What's next?

CFO David Zinsner said that the payouts will rise over time, but Micron's "first and foremost" tool for cash returns to shareholders will be an opportunistic buyback strategy.

The sudden appearance of dividend checks might make you wonder what's wrong with Micron's growth plans. A healthy tech company should be able to reinvest its cash flows into growth-boosting innovations rather than sending out cash checks to its investors, right? As it turns out, you really can have it both ways.

Tech giant Apple (AAPL -2.63%) raised some eyebrows when it started up a dividend policy in 2012, less than five years into the age of iPhone-based growth. At the same time, Cupertino's effective dividend yield started out at just 0.4%, below Micron's starting yield. Was that the end of Apple's growth ambitions? You be the judge:

AAPL Revenue (TTM) Chart

AAPL Revenue (TTM) data by YCharts

I'm not saying Micron is the second coming of Apple. The takeaway here is that Micron can send out dividend checks while also exploring healthy business growth, even in the ultra-competitive semiconductor sector. All told, this unexpected announcement looks like another handy tool in Micron's financial tool belt. Serious dividend policies are a welcome benefit for long-term investors.

Anders Bylund owns shares of Micron Technology. The Motley Fool owns shares of and recommends Apple. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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