While long-term investors should never overreact to any single earnings call for a company, quarterly updates can provide valuable data to help monitor the strength of an investment thesis. Specifically, for dividend payers like ASML Holding (ASML -7.09%), and Nasdaq (NDAQ -0.03%), recent earnings results offer an update on the durability of each business's passive income potential.
With growing dividends and high-quality operations boosting their performance, ASML and Nasdaq stocks posted total returns of 600% and 800%, respectively, over the last decade.
Let's take a look at why these two stocks look poised to continue generating market-beating returns far into the future.
1. ASML: A free-cash-flow juggernaut
Dutch multinational ASML has effectively created a near-monopoly on its extreme ultraviolet (EUV) lithography systems and deep ultraviolet (DUV) products that are used by semiconductor chip manufacturers to create their best-quality chips. That has made ASML vital to the semiconductor industry. As such a crucial cog in the technology sector, ASML stock has benefitted, nearly tripling in value over the last five years.
Thanks to its bleeding-edge innovations, ASML's continuous improvements in lithography allow for the projection of increasingly smaller and more complex patterns to be put onto silicon wafers. ASML explains that by "painting with this finer paintbrush," the company pushes Moore's Law to its fullest extent, packing as much power into a semiconductor chip in as little space as possible.
While its DUV systems are in high demand, its budding EUV unit holds the superior groundbreaking technology that may power the company's longer-term ambitions. A single EUV order often exceeds $200 million in price and requires multiple planes to deliver as well as months to assemble.
In ASML's most recent quarter, sales from EUVs accounted for 51% of revenue and DUV systems made up 49%. Management noted that despite being the older offering, DUV received historically high order intake as it continues to be used widely across the industrial, automotive, and energy industries which don't require the highest-end chips.
Because of short-term supply chain issues, trade restrictions with China, increased production costs, and some macro cyclicality, ASML's trailing-12-month revenue and free cash flow (FCF) actually dipped by 3% and 18%, respectively, compared to the year prior. This contributed to the stock's 39% drop year to date.
However, if we zoom out on our time horizon, we get a clearer picture of ASML's incredible track record of growth.
ASML Revenue (TTM) data by YCharts
Most importantly, for investors seeking passive income potential, ASML's dividend growth goes above and beyond thanks to the bundles of free cash flow (FCF) it still generates.
ASML's dividend yields hovers around 1.5% and it has growth at an 83% annual pace over the past decade. With a payout ratio of around 50% (and temporarily elevated at the moment), the company generates enough net income to keep raising the dividend while still funding further growth.
Trading at 20 times FCF, ASML stock is reasonably priced, has a rapidly growing dividend, and is crucial to the semiconductor industry, making it a fantastic holding for dividend-growth investors over the long haul.
2. Nasdaq: Anti-financial crime to the forefront
Nasdaq recently announced a corporate restructuring, splitting the company into three segments: market platforms, corporate access platforms, and anti-financial crime. This realignment could signal the beginning of a new era at Nasdaq as it looks to build upon its namesake index, exchange, and famous public listing services.
While the first two units remain the core of the company's operations, its new anti-financial crime segment aims to bring new growth -- and Nasdaq management wants to highlight that. Now broken out on its own, investors can see that the young unit increased sales by 24% in the third quarter of 2022 compared to last year and reported a solid 27% operating margin.
Compared to a companywide revenue uptick of 6% over the same time frame, the anti-financial crime segment's high-paced growth is impressive. Composed of Verafin Fraud and Anti-Money Laundering (FRAML) solutions, the "old" tech behemoth looks to reignite its growth flame by policing the markets for banks and financial institutions globally.
While this FRAML unit only accounts for 9% of the company's sales as of Q3 2022, look for it to continue growing in importance as the broader financial system continues its digitization. This technological transformation will require the safeguards that Nasdaq's security platform can provide, locking the company into an important role in the sector's evolution.
Partially due to the success of this budding operating segment, Nasdaq stock performance has successfully outpaced its own index (and the S&P 500 index) so far this year.
While Nasdaq's dividend yield is a bit underwhelming at 1.2%, its 24% payout ratio leaves a tremendous growth runway for potential increases.
Much like ASML, Nasdaq has offered investors generous dividend growth over the last decade, averaging nearly 34% annual increases over the past decade.
Also like ASML, Nasdaq trades at 20 times FCF, giving it an attractive valuation compared to the S&P 500's median price-to-free-cash-flow ratio of 39.
NDAQ Price to Free Cash Flow data by YCharts
Between the strength of Nasdaq's core operations, its intriguing FRAML growth prospects, and its steadily growing dividend, the company looks like a tremendous buy-and-hold investment.
