A chip giant riding a new round of hardware upgrade
Nicolas Rossolillo (Broadcom): When it comes to semiconductor stocks, recessions can be tough times. But COVID-19 did not induce any ordinary recession. While not all chip inventories have been immune to side effects, demand for the technology has been plentiful over the past year as companies strive to stay in business and consumers relentlessly supplied with electronics to spend more time at home.
For networking hardware giant Broadcom, that equates to a pretty good year given the circumstances. Revenue grew 6% year-over-year in the company’s fiscal 2020, including a 12% jump in fourth-quarter revenue to $ 6.5 billion. Infrastructure software has led the way higher, consisting of Broadcom’s acquisition of data center network management equipment from Brocade, CA Technologies and, more recently, Enterprise Security from Symantec, the remains of which are now NortonLifeLock (NASDAQ: NLOK). Chip sales were down 1% year-round but increased 6% in the fourth quarter, with Appleof (NASDAQ: AAPL) The iPhone 12 and other 5G mobile apps are bringing Broadcom’s bread and butter back to growth mode.
However, Broadcom’s strong performance in downsizing its operations to increase profitability has been even better than revenue growth. Free cash flow (revenue less operating expenses and capital expenses) increased 25% to $ 11.6 billion in 2020. This is largely positive free cash flow to cover the dividend ( which only cost Broadcom $ 5.53 billion in the past 12 months) and service its long-term debt of $ 40.2 billion (long-term debt peaked at $ 45.0 billion at the end of the second quarter).
Even after rising 34% in 2020 to date, stocks are pretty darn affordable at just 15.4 times 12-month free cash flow. Add in the manageable 3.4% annual dividend yield Broadcom is paying, and I say this remains a solid stock buy to make you happy with 2021 around the corner.
Try an orange diet high in fiber with massive dividend yields
Anders Bylund (Orange): French telecommunications Orange SA may not be the first dividend game that comes to mind in today’s market, despite its generous yield of 5.8%. The company won’t be joining the exclusive club of dividend aristocrats anytime soon, as Orange isn’t afraid to cut its payments when the money can be better used elsewhere. This attitude discourages many American investors, who expect a continuous series of annual increases in payments. However, occasional dividend cuts are common practice in overseas markets like Europe and Asia.
That being said, Orange recently increased its semi-annual payout from $ 0.30 to $ 0.40 per share at a time when many rivals are cutting their payouts to save their previous money. The management team is encouraged by higher revenues and strong cash flow in 2020. Looking ahead, the company continues to expand its global presence in mobile network services. In addition, CEO Stéphane Richard expects Orange’s heavy investments in fiber optic network infrastructure to bear fruit in the coming years.
“If I look to European telecom operators, Orange is the stock of fiber. Orange is the company that places the highest priority on fiber, ”Richard said at an industry conference in September. “Today, we have the footprint of Orange fiber in Europe, which is greater than the combined total of the 3 other major European telecom operators. ”
This is important, because Richard expects a large market shift in this direction.
“So we are the one who has prepared in the best way, in my opinion, what will be the next generation fixed broadband networks all over the world, which will be fiber to the home,” continued the CEO.
Orange is expected to be able to earn higher average revenue per user as the entire telecoms industry tries to catch up with this company’s market-leading assets and services.
In the end, Orange’s dividend is fueled by massive cash flow from an ambitious global growth strategy. Lock in that attractive dividend yield at the low valuation of 10 times trailing earnings and sit down to collect both rising stock prices and some fantastic dividend checks over the next few years.
Essential machines for a connected future
Billy Duberstein (Applied Materials): Applied Materials inventory is already up 47% from last year. But you know what? It’s still among the best tech deals. Applied is the largest manufacturer of semiconductor equipment by revenue, with a comprehensive product line spanning engraving, deposition, metrology and inspection tools for semiconductor manufacturing and of memory chips. As such, it is poised to benefit from any increase in spending on semiconductor manufacturing.
This scenario certainly seems likely. According to SEMI, the global semiconductor industry association, the amount of semiconductor equipment spending is expected to increase 16% this year to $ 68.9 billion, and then continue to rise to 71, $ 9 billion in 2021, then $ 76.1 billion in 2022. The semiconductor equipment industry is known to be cyclical, so some might find these estimates too optimistic. But that’s also why Applied Materials is so cheap compared to the rest of the tech industry, at just 18 times next year’s earnings estimates. And while its 1% dividend may not turn many heads, Applied’s payout ratio is very low at just 22%, leaving plenty of room for dividend growth and share buybacks.
There are also reasons to believe that the industry could become a steadily growing industry, as predicted by SEMI. Across the industry, large semiconductor foundries are fighting to catch up with the leader Semiconductor manufacturing in Taiwan (NYSE: TSM) in capacity. For example, Samsung recently announced a plan to spend $ 116 billion over the next few years to catch up on outsourced foundry activities.
And it is not only companies that are competing, but also countries. China still hopes to expand its domestic chip business, and the United States has just passed legislation that will give incentives and subsidies to chip manufacturing on American shores. All these entities competing for chip supremacy will have to buy bundles, bundles of Applied machines.
In addition, the NAND flash industry is currently rebounding after a declining year in 2019, as five major competitors battle to make the most efficient storage chips. Finally, the DRAM industry, which has seen two consecutive years of declining spending during the trade war, finally appears poised for a rebound in 2021.
As chips have gotten smaller and more advanced, manufacturing is currently hitting the limits of Moore’s Law, which predicts that the amount of transistors per chip will double every one to two years. As we have seen, this is becoming more and more difficult to achieve. However, the very complex and difficult nature of chip manufacturing only places more importance on equipment manufacturers like Applied Materials. This makes the stock a solid buy for 2021, even after its impressive 2020.