Dialog Semiconductor (OTC:OTC:DLGNF), A German technology company with a focus on mixed-signal circuits on mobile devices, is known as one of the main Apple (AAPL) suppliers. Along with Apple's success, Dialog Semiconductor shares boomed in 2009 and 2010. Over the past two years the share price is flat, as a result of uncertainty regarding future growth rate. On October 29, 2013 Dialog Semiconductor released promising third quarter results. However, shares are down 10 percent since the announcement. Apple faced similar pressure on its share price, before introducing dividend payments and a share buyback program. This article arguments Dialog Semiconductor should be paying dividends and/or introduce a share buyback program to attract interest from long-term investors and fuel its share price.
Dialog Semiconductor, founded in 1981, is headquartered in Stuttgart, Germany. The company designs, develops, manufactures and sells several products like mixed signal integrated circuits, short-range wireless systems, lightning solutions and products for the automotive industry. The company focuses on providing solutions for customers in the mobile industry. Revenues from mobile systems were 86 percent of total revenues in 2012. Dialog Semiconductor's main customers are multinational companies like Apple, Panasonic (OTC:PCRFY), Gigaset (GM:ARQTF), Samsung (OTC:SSNLF) and Bosch. These top five customers represent 91 percent of total revenues in 2012.
The company does not pay any dividend at this moment and has no share buyback program. Rather, the company invests in research & development and acquisitions. In 2011 the company acquired SiTel Semiconductor B.V. for $84.2 million to support their connectivity business and acquired iWatt Inc. for $310 million (potentially up to $345 million) to enter the market for power conversion. Most of the acquisition fees were paid in cash. As of September 30, 2013 the company still has $157 million in cash and cash equivalents.
Performance and outlook
Shares closed Wednesday at $17.47, a 4.2 percent year to date decline. Analysts and investors question revenue growth in the future. Total revenues have grown at high double-digit rates over the past year. For this year however, total revenue will grow 8.5 percent. Growth pace is likely to accelerate again in 2014 (see graph below). Twenty analysts, surveyed by Bloomberg, expect total revenues of $1.0 billion in 2014 (19 percent increase compared to 2013 estimates), exceeding the one-billion mark for the first time in the companies history. The accelerating growth is coming from new contracts signed (for example with Samsung) and full year consolidation of iWatt results.
There is more positive news from Dialog Semiconductors regarding new contracts and customers. On November 11, 2013 the company announced a partnership with Sengled, a global leading provider of LED lightning solutions. Sengled has a strong position in the fast growing Chinese LED market. The partnership will manufacture and market Dialog Semiconductor's smarteXiteTM platform. This technology is the world's first LED driver IC to support the new Ledotron dimming standard, according to the press release. Production is likely to start in the second half of 2014.
Let's take a look at the current valuation of Dialog Semiconductors compared to three main competitors: Avago Technologies (AVGO), STMicroelectronics (STM) and Texas Instruments (TXN). Fundamentals are displayed in the graph below.
Considering the data in the graph above, Dialog Semiconductor's valuation looks attractive. Estimated EPS and Forward P/E favor Dialog Semiconductor over the three competitors. The company's P/E ratio is just 11.64, quite low given its history as a fast growing company and favorable outlook. On the other hand, Dialog Semiconductors pays no dividend compared to its peers, which could turn away long-term investors looking for stable (dividend) returns.
Apple faced similar problems recently. Investors stepped away from a high double-digit growth scenario and the stock price was very volatile for some time, which stopped a long upward trend (see graph below; Apple: red, Samsung: green, Dialog: blue). To meet investors demand for return on their investments, Apple introduced a quarterly dividend and an aggressive share buyback. Unthinkable several years ago. This is quite the same story for Dialog Semiconductor. Growing revenues from $162 million in 2008 to $772 million in 2012, future revenues will grow in a moderate pace (still 10-20% a year). Dialog Semiconductor's current cash position is more than enough to manage ongoing operations.
Free cash flow
Two potential reasons for Dialog Semiconductor's low valuation, compared to industry peers, are the lack of dividend and no share buyback program. No stable income from dividends or support from a share buyback program makes the stock less attractive for long-term investors. To support my claim for dividend payments and/or share buyback program, I estimated free cash flow for 2014 (see graph below). The graph shows estimated OCF, CAPEX and FCF for 2013 an 2014 compared to actual numbers for 2011 and 2012. The following assumptions are made:
- 65.8 million share outstanding
- 2013 and 2014 net profit (outstanding shares times Est. EPS)
- OCF adjusted for changes in working capital
- CAPEX in line with FY 2013 / 2014 guidance
- No major acquisitions in 2014
- All numbers displayed in millions USD
|Description||2014 E.||2013 E.||2012 A.||2011 A.|
Dialog Semiconductor will be able to generate $90 million of free cash flow in 2014, adjusted for changes in the working capital. Given current cash reserves of $157 million (probably even higher at year end 2013), the company could spent 40-50 percent of free cash flow in dividends and share buybacks, without waiving interesting acquisitions in the future. The balance sheet is solid, considering solvency ratio at 46 percent. A 40 percent pay-out of free cash flow will provide investors with a $0.55 dividend a share, or a yield of 3.10 percent (higher than Texas Instruments and Avago Technologies).
The company should pay dividends to its shareholders or start buying back own shares, because free cash flow will go up as a result of stronger growth and acquisitions, Further, the company's current valuation is low compared to competitors. The company will still be able to make acquisitions in the future. Giving back money to the shareholders will interest a new group of investors, boosting interest for the stock and supporting the share price in the long run.
In my opinion it is inevitable Dialog Semiconductor will decide to pay dividends and introduce a share buyback program, especially given current low valuation and disappointing share performance. I will be in contact with the company and address this matter during the next shareholders' meeting. Therefore, long-term investors should consider Dialog Semiconductor as part of their portfolio, anticipating potential announcements of dividend payments and the introduction of a buyback program. Especially because the stock is currently trading at a low valuation.