As one of the leading providers of wafer fabrication equipment used in semiconductor manufacturing, Lam Research (LRCX +3.55%) may be one of the most important companies in the world. Chipmakers rely on its tools to produce the semiconductors that are vital to everything from data storage to smart cars to mobile devices.
Despite this, shares of Lam Research are down 47% year to date. Here's why I see the sell-off as a buying opportunity and why I keep taking advantage by buying more shares.
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The sell-off looks overdone
Lam Research's stock is down in large part because the semiconductor industry as a whole is suffering from supply chain constraints, and due to general concern that an impending recession will curtail demand. While these are indeed challenges in the immediate future, we know that over the long run, demand for semiconductors is only going to increase. For example, Intel, one of Lam Research's key customers, expects global demand for semiconductors to grow from $600 billion annually today to $1 trillion by 2030. Semiconductors are often associated with computers and smartphones, but they are becoming increasingly crucial components of cars, Internet of Things (IoT)-connected devices in the smart home, and data storage centers, so demand for chips will continue to grow as more devices become "smart."
The massive year-to-date sell-off looks overdone, and based on this decline, I have added to my Lam Research position and made it one of my largest holdings. Shares of Lam Research trade at just 11.5 times earnings, which is significantly cheaper than the multiple for the broader market or for the S&P 500 tech sector.
Within the semiconductor equipment industry, Lam Research trades at a significant discount to ASML Holding, which trades at a price to earnings multiple of over 30, and in line with Applied Materials, which also trades at 11.5 times earnings. Taiwan Semiconductor, the largest semiconductor manufacturing company by market cap, is valued at about 15 times earnings. Lam Research also trades at a discount to leading semiconductor companies like Nvidia and Advanced Micro Devices, which enjoy price to earnings multiples of 42 and 29, respectively. With a more attractive valuation than many of its peers, the S&P 500, and much of the technology sector as a whole, shares of Lam Research looks like a compelling buy at their current level.
NASDAQ: LRCX
Key Data Points
Underrated dividend growth story
In addition to this favorable valuation, Lam Research also pays out an attractive and growing dividend. Shares yield 2%, which isn't a bad payout but may not be enough to get hardcore dividend investors excited. However, look a bit deeper and Lam is an excellent dividend growth stock. Lam recently upped its dividend by 15% to $1.725 per quarter. Zooming further out, Lam has grown its dividend by nearly 400% since 2017, when its quarterly payout was $0.45 a share. Furthermore, the company can pay out this dividend quite comfortably -- the $6.90 per-share payout is covered many times over by Lam's consensus forward earnings estimates of $37.18 per share. This equates to a dividend payout ratio of just 18%. This low payout ratio also means that Lam has plenty of room to continue to grow the dividend for years to come.
Additionally, Lam Research is enhancing shareholder returns with share repurchases. In May, Lam's board authorized a share repurchase plan of $5 billion. Due to the current sell-off, this equates to about 10% of the company's current market value. Share repurchases benefit shareholders because they reduce the number of shares outstanding and thus increase earnings per share. Furthermore, they can also be seen as a sign that management thinks the stock is trading below its intrinsic value.
Lam Research is a strong buy
It hasn't been a lot of fun to be a Lam Research shareholder this year. But going forward, Lam Research's strong position in a fast-growing and globally critical industry, its attractive valuation, and its safe and growing dividend payout make it one of the most compelling buys in today's market. I have repeatedly added to my position and view it as an investment that I will look back on as a no-brainer several years from now.
