Xilinx (NASDAQ:XLNX) is a leader in the programmable logic devices field, controlling approximately 50% of the market it specializes in. Despite its strong position in a growing industry, the company has seen its share price fall roughly 18% year to date, and now trades in the $37 range, representing a new 52-week low.
The maker of programmable circuits supplies chips that are used in cell-phone communication towers, and has recently experienced some turbulence due to a slower-than-expected rollout of 4G technology in China. The downward pressure on its price has pushed its dividend yield up to 3.1%, a level that compares favorably against other semiconductor companies that pay dividends.
With its share price at relatively low levels, strong cash flow, and history of raising its dividend payout, there are compelling reasons to take a position in Xilinx. That said, the company is also facing some significant hurdles, and these challenging elements should be weighed against its apparent strengths for a more complete estimation of the stock's future.
Here are two things that Xilinx dividend investors need to know.
Heavy reliance on the Chinese market comes with substantial risk
As the world's largest market for mobile devices, China is key to Xilinx's future. Thirty-five percent of the company's revenue in its last fiscal year came from Asia-Pacific territories, and that share should be significantly higher this year due to 4G LTE expansion in the region.
To give an idea of what the geographic breakdown of its business might look like by the end of the annual fiscal term, its last-recorded quarter saw 43% of its business come out of China and other Asia-Pacific territories. With the rollout still under way, it's not unreasonable to believe that the annual share will be even higher. Having a leading position in the world's biggest mobile market is great, but there are also circumstances and conditions in China that could destabilize Xilinx's business and stock.
Mounting tensions between China and Hong Kong and Taiwan have also heightened tensions between the Eastern power and Western nations. The political flare-ups arrive on the heels of concerted antitrust investigations by China designed to reveal alleged improprieties by foreign companies that do business within its borders. Among many others, these anti-monopoly investigations have targeted American tech companies like Microsoft and Qualcomm, and the belief that these regulatory probes are being conducted with the intent of creating a business climate more favorable to Chinese companies is not uncommon.
While Xilinx can't reasonably be said to have a monopoly on the programmable logic devices market, it essentially splits the sector with its main competitor, Altera (NASDAQ:ALTR) . That these American companies control the production of chips that are fundamental in communications and defense technologies goes against China's national interests, and it's possible that the country will use its regulatory muscle in ways damaging to Xilinx's business, or that it will attempt to prop up a local manufacturer of programmable semiconductors.
The competition with Altera is an x-factor for Xilinx
The current market for programmable logic devices may be large enough, and growing fast enough, to allow both Xilinx and Altera to prosper; but it's difficult to predict how the adoption of their respective technologies will impact market share. Xilinx sells roughly 70% of the world's programmable 28-nanometer chips, but Altera may have significant advantages when it comes to next generation die shrinks. The rival company has partnered with Intel to manufacture and market 14-nm chips, which represents a significant threat to Xilinx's own, less-advanced, 16-nm offerings.
Altera's software system is also widely viewed as stronger than what Xilinx offers, so as 28-nm programmable devices are phased out in favor of the next-generation sets, it looks like Altera has the opportunity to increase its market share. Xilinx may be forced to increase its research and development expenditures, or lower its prices if Altera's chips gain market favor. Either of these moves could hurt the company's margins.
What does the future hold for Xilinx dividend investors?
Last year, Xilinx distributed $267 million in dividend payments to investors. With cash and short-term investment holdings of approximately $2.5 billion, the company could continue to pay dividends at current levels for eight years even if it fails to generate profit throughout that period. That's not a likely scenario, but it is an indication that the company's dividend structure is strong, particularly in light of sustained increases to payouts during the last 10 years.
Investors can be reasonably assured that Xilinx's dividend offering will remain an attractive component of the stock. Whether or not the company can grow in line with its targets and retain its market share advantage are the bigger points of uncertainty.
Keith Noonan has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.