STMicroelectronics Looks A Lot Better Now That It Yields Almost 5%

| About: STMicroelectronics NV (STM)

After the recent market pullback, now is a great time to go shopping for bargains in the market. For me, an avid dividend investor, that means checking for stocks whose yields have gotten significantly higher as a result of the dip, and pouncing on the best ones. One company in particular that I have my eye on is STMicroelectronics (NYSE:STM), which is yielding 4.88% thanks to the recent market action.

About STM

STM is the largest European semiconductor manufacturer and is the second largest mobile semiconductor manufacturer, behind Qualcomm (NASDAQ:QCOM). The company produces a wide variety of semiconductor integrated circuits for a long list of end markets. The company's products can be categorized into three segments: Sense and Power, Automotive Products, and Embedded Processing Solutions.

The company has an all-star list of customers which includes Apple (NASDAQ:AAPL), who buys their MEMS (stands for microelectromechanical systems) chips from STM. Although Apple is on the list, the company's annual report makes clear that no single customer accounted for more than 10% of the company's sales. Other customers of STM include BlackBerry (NASDAQ:BBRY), Cisco (NASDAQ:CSCO), Hewlett-Packard (NYSE:HPQ), Nokia (NYSE:NOK), Sony (NYSE:SNE), and Western Digital (NYSE:WDC), just to name a few.

The price action and what it means to you

In the past month, shares of STM have sunk by more than 16% due to a combination of the falling overall market, a subpar quarterly report in late July, and a round of analyst rating cuts. While this is a most unfortunate situation for existing investors in the company, it creates an excellent opportunity for new ones. Specifically, as a result of the lower share price, annual yield has jumped from 4.08% to 4.88%, which means a lot over the long term.

The lower price also gives the company a much more attractive valuation. While it is true that STM is expected to finish in the red this year (the consensus calls for a loss of 13 cents per share), earnings should rebound strongly over the next few years as a result of both better operating costs due to the company's recent restructuring and higher total sales to do a lot of new product cycles by the company's customers.

In fact, the projections call for earnings of $0.66 in 2014, rising to $0.88 in 2015. In other words, at the current share price, STM trades for 12.4 times forward earnings. Not too bad for a company with over $1.8 billion in net cash and rapidly declining debt levels. Excluding cash, STM's business trades for just 9.7 times forward earnings. How many other stable companies that yield close to 5% can say that?

But how will the company grow?

Almost 20% of the company's sales come from the automotive industry, which should be a nice catalyst going forward, as the industry has been experiencing very nice sales growth, and cars are being built with more and more high-tech features. The company's products include powertrain microcontrollers, audio devices, infotainment, and convenience features. The company's embedded processing segment (46% of total sales) is also a leading producer of microcontrollers for all kinds of consumer electronics, including wireless devices and video equipment such as set-top boxes and LCD TVs.

The upcoming Apple product refresh cycle is certainly worth keeping an eye on for STM shareholders. If the early sales numbers start coming in better than expected, this could be a tremendous upside catalyst for STM.

The trade …

While the market may indeed decline a little further, I think that the bottom in STM isn't far away. With a solid restructuring plan in place, as well as tremendous growth in the industries that buy STM's products, I feel very confident in saying that while we may see some volatility in the short-term, STM is a long-term buy. I do believe that STM will return to profitability as projected next year, and will grow its profits nicely going forward. In the meantime, however, you will be paid almost 5% for your patience.

Disclosure: I am long AAPL. 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.