Why Applied Materials Will Lead the Dividend Growth Race
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The Value of Long-Term Investing
Investing wisely for the long term can yield substantial returns over decades. For individuals in their early to mid-adulthood, it’s important to consider income streams for retirement that may come 20, 30, or even 40 years down the line when selecting stocks today.
Dividend growth stocks represent one of the most effective strategies for achieving a healthy retirement. These stocks might not provide impressive current dividend yields, but if they succeed in consistently growing their payouts above the inflation rate, the power of compounding can significantly enhance one’s financial future.
Applied Materials and Dividend Growth
Applied Materials (NASDAQ: AMAT), a prominent player in the semiconductor equipment industry, currently offers a modest dividend yield of 0.7%. However, for investors with a long-time horizon, there are compelling reasons to believe that these payouts may significantly increase over the next five, ten, or twenty years.
AI-Driven Growth and Operational Efficiency
For any company to grow its dividends, it must first achieve growth in its earnings per share. The most feasible pathway to expand both earnings and cash flow is through efficient growth in their business operations. On this front, Applied Materials appears well-positioned due to a range of technological advancements, including artificial intelligence (AI) and an energy transition.
As the leading semiconductor equipment provider by revenue, Applied Materials boasts a diversified portfolio. The company has a robust presence in etching and deposition, serving critical manufacturing steps and is also active in metrology and ion implant technologies.
Applied Materials has maintained leadership across multiple semiconductor domains, including cutting-edge, legacy, and memory chip production. This versatility has enabled the company to stay ahead of market trends. Despite the cyclical nature of the semiconductor sector, it is fundamentally a growth industry, and Applied Materials has enjoyed an average earnings growth rate of 26% over the past five years.
Recognized for Efficiency
While maintaining high growth is challenging as a company scales, analysts project that Applied Materials will still deliver an average earnings growth rate of about 15.6% over the next five years – a rate significantly above market averages.
The company benefits from operational efficiency, achieving impressive margins close to 30%, with a remarkable return on equity of 43% within the last year.
Strong Foundations for Dividend Growth
Another critical factor influencing Applied Materials’ dividend growth is its low payout ratio, currently at just 15.3%. This indicates that the company allocates merely 15% of its net income to dividends.
The organization is also committed to returning capital to shareholders through aggressive share repurchase programs. In a recent quarter, share repurchases amounted to $861 million, surpassing dividend payments of $331 million by a ratio of 2.6 to 1.
This strategy of share repurchasing not only provides significant flexibility to potentially increase the payout ratio but also contributes to a declining share count. Over the past year, repurchases have reduced the total share count by around 1.2%, which allows the company to theoretically raise the dividend per share by a similar percentage without increasing total payout dollars.
Capitalizing on a Resilient Market Segment
Furthermore, Applied Materials links its dividend payouts to profits earned from its services segment, which constituted 23.3% of the company's revenue in the previous quarter, boasting operating margins of 29.6%.
During a conference call with financial analysts, CFO Brice Hill expressed optimism about future dividend increases, stating, "We think of our dividend as being sustained by profits from our services business, providing confidence that we can raise our dividend moving forward."
While the primary business involves selling high-tech equipment, a notable strength of Applied Materials rests in attaching services agreements to its machines, ensuring more steady revenue growth. Approximately 85% of service revenue derives from recurring contracts.
As the installed base of equipment grows year after year, even amid fluctuations in machine sales, the services segment has consistently exhibited growth. In the last quarter, equipment sales rose by 5.3%, while services revenue grew by 8%, marking the 20th consecutive quarter of growth in this area.
Long-Term Growth and Stability
Looking ahead, Applied Materials anticipates double-digit growth in its services sector. This outlook is bolstered by an increasing reliance on software within services agreements, leveraging AI to enhance product quality and yield rates. Management has identified the average subscription terms lasting approximately 2.8 years, accompanied by a promising renewal rate exceeding 90%.
This recurring nature fundamentally supports the stability of the dividend and allows room for consistent annual growth. Should Applied Materials achieve low-double-digit growth in its services segment, such an increase is likely reflective of future dividend growth expectations.
Is Investing in Applied Materials Right for You?
Before deciding to invest in Applied Materials, consider your investment strategy and long-term financial goals.
Frequently Asked Questions
1. What is the current dividend yield for Applied Materials?
The current dividend yield for Applied Materials (NASDAQ: AMAT) is 0.7%.
2. What factors contribute to dividend growth for Applied Materials?
Factors include low payout ratios, strong earnings growth, and substantial share repurchase programs.
3. How does the company's services segment impact its profitability?
The services segment provides recurring revenue and stability, making up 23.3% of the company's revenue.
4. What is the expected earnings growth rate for Applied Materials?
Analysts anticipate the company will deliver an earnings growth rate of around 15.6% over the next five years.
5. Why is Applied Materials considered a strong investment for dividends?
The combination of effective management, low payout ratios, and growth potential in the semiconductor and services sectors makes it a compelling option for dividends.
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