It's not news that the tech sector remains in the doldrums, especially semiconductor stocks, including semiconductor manufacturing equipment. In fact, Citigroup analyst Christopher Danley thinks the semiconductor industry may be in for a bad downturn next year -- perhaps the worst in the past decade.
Of course, this isn't exactly news, as the VanEck Semiconductor ETF is down 29.2% this year.
The thing about cyclical industries like semiconductors, though, is that while they go through busts, they also go through booms. Over time, the semiconductor industry is still set to outgrow the broader economy, as more and more chips go into more devices and enable new applications.
With next year's downturn at least partially priced in, now may be the time to scoop up some beaten-down semi stocks. And one of the sector's leading names just showed confidence by raising its dividend by 15%.
Lam Research continues to raise the bar
Etch and deposition equipment maker Lam Research (LRCX 3.03%) recently announced a 15% increase in its dividend, with an upcoming ex-dividend date on Sept. 13. The new increase, combined with Lam Research's beaten-down share price -- down 38% on the year, in fact -- has pushed the forward dividend yield to a respectable 1.6%.
That's a pretty good starting yield, considering Lam has increased its dividend per share nearly tenfold since 2014. Given that track record, as well as the fact Lam still only pays out a mere 18% of its trailing net income as dividends, and investors can expect those payouts to grow handsomely, not just this year, but also in the years ahead.
Those dividend increases have been helped along by ample share repurchases, which still make up most of Lam's shareholder returns today. Since 2017, shares outstanding have decreased about 25%. Meanwhile, today's beaten-down share price is an opportunity to bring that share count down even further.
Over the past 12 months, Lam Research repurchased another $3.7 billion in stock. Given Lam's forward guidance for increasing earnings, as well as its growing backlog, it wouldn't be a surprise to see the company match or exceed that level of repurchases this year. That same level of repurchases at today's share price amounts to another 6.1% return of capital to shareholders, for a total shareholder return of 7.7%.
Why the stock is so cheap
Trading at a valuation far below the overall market at just 13.5 times earnings and 11.6 times next year's earnings estimates, there is obviously a fair amount of skepticism about Lam specifically and semiconductor equipment sales generally.
Lam gets a little bit more than half of its equipment sales from the memory sector, and all of the major memory customers have said they will be cutting back on their equipment purchases next year amid industry oversupply.
Yet while memory is going into a downturn, foundry and logic investment still seems like it may hold up. Given that Lam was hampered by supply constraints earlier this year, its backlog should enable foundry and logic sales to hold up relatively well in the coming year.
Remember, Samsung and Intel are investing heavily to try to catch up with Taiwan Semiconductor Manufacturing in leading-edge production. Meanwhile, with the passage of the CHIPS Act in the U.S. and other semiconductor subsidies passing in Europe, the buildout of foundries in those regions for strategic reasons should keep foundry equipment sales positive, even if end demand softens in the near term. Furthermore, there is still a shortage of some lagging-edge chips for autos and other devices, so those investments should carry into next year as well. These factors may smooth out equipment spending more than some think.
When investors worry about the short term, think long term
The good thing about the semiconductor industry is that as long as digitization moves forward, semiconductors and semiconductor equipment will as well, once we get past the current uncertainty. When zooming out, Lam looks like a growth stock, not a cyclical one.
LRCX Revenue (TTM) data by YCharts
While the large drawdowns are unpleasant, the upside of Lam's volatility is that it affords management the opportunity to repurchase a good amount of stock every time the stock swoons, lowering the share count and boosting earnings and dividends per share.
While no one knows exactly how deep the semiconductor downturn will be or how low the stock will go, history has shown these big pullbacks are often great opportunities to buy semiconductor equipment stocks like Lam on the cheap.
With the increased dividend payout coming in the next two weeks, today could very well be one of those times.
