The technology industry has a reputation for growth, not dividends. But the tech hardware sector is a bit different. Many companies in the space do pay out growing dividends, trade at reasonable valuations, and have compelling growth prospects.
Yes, their cyclicality can make for ups and downs, but best-in-class chip, equipment, and hardware names should continue to grow over the long term. That's especially true for stocks exposed to strong trends like artificial intelligence (AI) and electrification.
Smack dab amid these trends, the following tech stocks look like compelling buys in June.
Microchip Technology is increasing dividends every quarter
If you're looking for resilient and consistent performers, semiconductor company Microchip Technology (MCHP -1.01%) fits the bill. Yet surprisingly, Microchip's stock can be bought today for much, much cheaper than similarly well-regarded peers.
Since the company's initial public offering (IPO) in 1993, Microchip's stock has gone up a whopping 236 times, good for roughly 20% compounded growth over 30 years. This is about the same rate of return as Warren Buffett's conglomerate Berkshire Hathaway, albeit over a shorter period.
Microchip's core business is in programmable microcontrollers -- the small, low-power computers that go into a wide variety of devices, from airplanes to data centers to consumer appliances, and more. After innovating the programmable microcontroller in the 1990s and 2000s, Microchip then went on an acquisition spree, buying some 15 large companies between 2008 and 2020, along with smaller tuck-in acquisitions.
Acquisitions got Microchip into the large analog chip space, not only growing the company's addressable market but also allowing it to cross-sell other chips around the core microcontroller system. Revenue and cost synergies have allowed Microchip to generate very high operating margins, which reached 47.6% last quarter.
Microchip management says it's done with large acquisitions and is now focused on returning cash to shareholders. Earlier this year, the company hit its leverage target after five years of paying down debt following its Microsemi acquisition. It's now ramping up payouts.
Last quarter, the company paid out 62.5% of its free cash flow to shareholders via dividends and share buybacks. It plans to increase that payout by 5 percentage points each quarter until it pays 100% of free cash flow to shareholders by March 2025. As you can see, Microchip's 2% dividend has been increasing not just annually, but every quarter over the past two years:
MCHP Dividend Per Share (Quarterly) data by YCharts.
Strikingly, Microchip also trades at a much cheaper valuation than its larger microcontroller and analog peers, despite outperforming both of them during this downturn.
MCHP PE Ratio (Forward) data by YCharts.
As Microchip's cash payouts close in on 100% in the next two years, I expect that gap to close, making Microchip an excellent buy in June.
Aixtron: A German equipment company seeing EV growth
Many investors are also bullish on power semiconductors these days, especially those made of silicon carbide (SiC) and gallium-nitride (GaN) compounds. That's because these two emerging types of chip alloys have high conductivity and heat resistance and are thus excellent for electric vehicles (EVs), electrified utility infrastructure, and other applications such as charging stations, data centers, and more.
German company Aixtron (AIXXF -2.27%) makes the key deposition and epitaxy machinery that enables chipmakers to produce these compounds. Moreover, it has limited competition, with just a handful of companies making epitaxy machines for SiC and GaN.
In addition to power electronics, Aixtron also has smaller exposure to the growth areas of microLEDs and optoelectronics. While Aixtron's dividend yield is only 1.05% today, the company appears to have strong growth prospects.
Aixtron's current financials are a bit misleading, as it was unable to ship some machines due to export licenses being held up by German authorities last quarter. So revenue was down 13% last quarter. However, Aixtron's order intake was up 7%, and its backlog is currently 60% higher than this time last year.
Assuming the license issue gets cleared up, Aixtron is predicting between 580 million and 640 million euros in revenue this year, which would mark 32% growth over 2022. Management also expects operating margins to be around 26%. Assuming a 20% tax rate, Aixtron would be trading around 26 times this year's earnings, per management's forecast.
That's not cheap, but also not demanding for a company riding the electrification wave through the rest of the decade.
Kulicke & Soffa should bounce back stronger
Another megatrend in the chipmaking space is that of advanced packaging. Not only are more and more semiconductors needing to be connected into ever-more elaborate systems to boost power and efficiency, but we're also seeing leading-edge chipmakers using "chiplet" architectures today. That's when specific parts of a processor are manufactured separately, then stitched together with new packaging techniques to construct the processor.
Kulicke & Soffa (KLIC) has its core business in traditional wire bonding, which is a good long-term business but highly cyclical. However, management has also been introducing new advanced packaging techniques for leading-edge applications like chiplets in recent years. In addition, management is also making machines to produce microLEDs, which could soon replace the traditional OLED screens of today -- first in high-end applications like tablets and high-end TVs, then potentially in larger mass markets, like smartphones.
Kulicke & Soffa just posted some ugly numbers, with revenue down 55% from a year ago. However, management noted that last quarter should be the bottom of the cycle. And the company was still profitable, taking in $22 million in adjusted (non-GAAP) profits, handily covering the company's 1.4% dividend.
Not only does Kulicke and Soffa see sequential growth going forward, but in recent days, leading-edge foundry Taiwan Semiconductor Manufacturing noted that the recent surge of demand for AI chips has caused advanced packaging demand to exceed its supply.
We appear to be on the brink of the next upcycle for packaging after a year of brutal declines. Not only that, but Kulicke & Soffa should come back more resilient, as new growth drivers in advanced packaging and microLEDs grow to make up a larger part of the business.
