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This Artificial Intelligence Stock Raised Its Dividend on "Black Thursday"

As many now know, last Thursday was an historic day in the stock market. On March 13, 2020, the S&P 500 plunged 9.5% in a single day, the worst daily drop since "Black Monday" in 1987. The plunge came the day after President Trump delivered an underwhelming speech that included a European travel ban. However, stocks rallied on Friday after news of more government stimulus, emergency measures to boost testing, and the purchasing of oil for the country's strategic reserve. Negotiations for a comprehensive support package for the economy are also ongoing.

However, one tech company was tuning out the noise. Semiconductor equipment maker Applied Materials (NASDAQ: AMAT) decided to announce an increase in its dividend on the exact same day the market went into freefall. Is that a sign of confidence, or foolishness?

Image source: Getty Images.

A modest raise in trying times

Applied Materials announced that it would raise its quarterly dividend by a penny, from $0.21 to $0.22, a 4.8% boost. Applied's dividend yield is now 1.86%, but that's with a very modest 27.5% payout ratio. The higher dividend will be paid out on June 11, to shareholders of record as of May 21. CEO Gary Dickerson said: "We are increasing the dividend based on our strong cash flow performance and ongoing commitment to return capital to shareholders. ... We believe the AI-Big Data era will create exciting long-term growth opportunities for Applied Materials."

Semiconductors and semiconductor equipment companies have historically been known to be cyclical parts of the tech industry. However, it appears Applied Materials believes the overarching trends for faster and smarter semiconductors should help the company power through a near-term economic disruption. As chip-makers make smaller and more advanced chips, Applied's machines are a necessary expenditure.

But can the long-term trends buffer the company in a times of a potential global recession?

A strong quarter

It should be known that the semiconductor industry was already in a downturn last year in 2019, and was beginning to come out of it in early 2020. For Applied, last quarter's results exceeded the high end of its previous guidance, with revenue up 11% and earnings per share up 21%. On Feb. 12, management also guided for solid sequential growth in Q2 even while lowering its prior numbers by $300 million because of coronavirus as of that date.

On a Feb. 12 conference call with analysts, Dickerson reiterated that optimism:

We believe we can deliver strong double-digit growth in our semiconductor business this year as our unique solutions accelerate our customers' success in the AI-Big Data era... our current assessment is that the overall impact for fiscal 2020 will be minimal. However, with travel and logistics restrictions, we do expect changes in the timing of revenues during the year. We are actively managing the situation in collaboration with our customers and suppliers.

Third-party estimates are somewhat mixed

While many businesses across the world have seen severe interruptions, it's unclear if the chip industry will be affected as much as others, despite its reputation for cyclicality. While consumer-related electronics may take a temporary hit to demand, a more stay-at-home economy means the need for faster connections, which could actually increase demand for servers and base stations.

Memory chip research website DrameXchange released a report on March 13, outlining its current projections for the DRAM and NAND flash industries as of March 1, along with an updated "bear case" scenario should the coronavirus crisis escalate into a global recession, which was updated on March 12.

Category

Current 2020 Projections

Bear Case 2020 Projections

Notebook computer shipments

(2.6%)

(9%)

Server shipments

5.1%

3.1%

Smartphone shipments

(3.5%)

(7.5%)

DRAM price growth

30%

20%

NAND flash price growth

15%

(5%)

Data source: DrameXchange.

Notice that the enterprise-facing server industry looks poised to withstand a potential severe downturn much better than consumer-facing notebook or smartphone industry. In addition, DRAM prices are poised to increase in 2020 even in a recession, as prices had already crashed last year and the industry cut back on capacity. NAND flash had an earlier downturn than DRAM, and was already beginning to come out of it, so it has more potential with a decline in pricing.

In addition, the largest global foundry Taiwan Semiconductor (NYSE: TSM), just said on March 11 that its capacity for leading-edge 5nm chip production was already "fully booked," and that volume production would begin in April. That indicates continued strong demand for leading-edge logic chips.

So while there may be some more softness in certain parts of the chip industry, there are still relatively strong segments as well. Therefore, Applied may not face revenue declines in 2020, but rather a mere absence of previously forecast growth. Yet even if that happens, growth will likely be deferred to 2021, not totally lost, as eventually the demand for chips will increase.

After its decline, Applied Materials stock trades at just 17 times trailing earnings, and just 14.7 times projected 2020 earnings, though 2020 projections may come down. Still, that's a reasonable price to pay for Applied, especially in a zero-interest rate environment. The company has just as much cash as debt, and its recent dividend raise on the market's darkest day in recent history shows long-term confidence. Risk-tolerant investors with a long enough time horizon thus may want to give Applied -- and the entire chip sector -- a look after the dust settles.

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Billy Duberstein owns shares of Applied Materials and Taiwan Semiconductor Manufacturing. His clients may own shares of the companies mentioned. The Motley Fool owns shares of and recommends Taiwan Semiconductor Manufacturing. The Motley Fool recommends Applied Materials. The Motley Fool has a disclosure policy.


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