4 Semiconductor Companies For Growth And Income

Includes: INTC, MCHP, STM, UMC
by: Matthew Frankel

In a retirement account, it is important to create current income while keeping opportunities for growth in your portfolio. One of the best ways to keep your portfolio growing while maintaining a stream of income is to invest in well-established technology companies. My favorite area to invest in currently in tech is semiconductor manufacturers.

There are many great companies to consider, but for the purposes of this comparison, we'll stick to those that pay at least a 4% annual dividend. We are also going to limit our results to those companies with a market capitalization of at least $5 billion, as I like to stay away from small tech companies, especially when I want to rely on them for income.

My four favorites in no particular order are:

  1. Microchip Technology Inc. (NASDAQ:MCHP) - This company develops and manufactures specialized chips for a wide variety of embedded control applications. Microchip is a leading producer of microcontrollers, having produced over 7 billion since 1999, and this aspect of the business accounts for 68% of the company's sales. For fiscal year 2013 (ending in March), analysts' consensus calls for earnings of $2.05 per share, meaning the stock trades at 15.9 times current year earnings. This is well below MCHP's historical average multiple of 19, indicating the stock is attractively priced currently. Additionally, the company pays a 4.3% dividend, which has been raised every year for the past decade.

  2. STMicroelectronics NV (NYSE:STM) - This Switzerland-based company is the largest European semiconductor manufacturer. The company produces a wide variety of semiconductor products, and its largest customer is Nokia (NYSE:NOK), accounting for about 10% of the company's sales. STM lost money on its wireless business throughout the past few years, which it is in the process of exiting. Given the exit, analysts estimate the company will earn $0.23 per share, for FY 2013, rising rapidly to $0.65 in FY 2014 when its wireless exit has taken effect. So, the fact that the stock currently trades at 30.8 times 2013's earnings sounds very expensive. Excluding wireless, the numbers are much better, as reflected in forward estimates, and the stock trades at only 10.9 times forward earnings. Not bad for a company with a 5.64% yield!

  3. Intel (NASDAQ:INTC) - Intel is the world's largest manufacturer of microprocessors, and one of the highest yielders in our comparison, currently paying a 4.36% yield. Intel currently trades at only 9.8 times FY 2012 earnings, and is projected to grow its EPS at a 5% rate annually for the next several years, according to Standard & Poor's. The consensus 1-year price target for INTC is $23.14, so investors have a potential 12% upside to go along with the nice yield.

  4. United Microelectronics Group (NYSE:UMC) - This company operates primarily through wafer production services, and distributes its products throughout North America, Asia, and Europe. UMC currently trades at 16.4 times TTM earnings, and is expected to earn $0.16 per share in 2013. Assuming it keeps the same P/E multiple, this gives us a target of $2.62, which is 33.2% above current prices. UMC also pays a healthy 4.21% dividend, making this a great income play with tremendous upside.

In conclusion, all of these companies are well-established income sources with upside potential. Analysts are bullish on all four of these companies, and an investor would be wise to add a couple (or all four) of these stocks to their tech holdings.

Disclosure: I am long INTC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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