Is STMicroelectronics A Good Dividend Stock?

Apr. 2.14 | About: STMicroelectronics NV (STM)

Summary

Efficient management of cash and CapEX will allow the company to maintain its dividends.

Decreased CapEx and recovering operating cash flows will bring down the payout ratio.

Growth from the nano-technology segment should support the expected rise in the stock price.

STMicroelectronics (NYSE:STM) is a semiconductor manufacturer, with a market cap of $8.2 billion. The company manufactures a wide variety of semiconductor integrated circuits for global supply of its products. STM also serves some of the world's biggest technology giants such as Apple (NASDAQ:AAPL), General Electric (NYSE:GE), Nokia (NYSE:NOK) and Siemens (SI). Despite the versatile client base and largest product development in the industry, the company faced severe losses due to partnership with Ericsson (NASDAQ:ERIC) in the past few years. The stock has shown mixed trend over the last six months; however, year-to-date, it is up over 15%. In this article, we will discuss the dividends, growth in dividends and the future prospects of the company.

Dividend Growth

The growth in dividends for STM has been less than impressive - the company has increased its dividend only twice since May 2009. Since the company reduced the dividend from 9 cents to 3 cents in May 2009; the increases in the dividend has been quite large. However, the current quarterly dividend of $0.10 per share stands just 1 cent above the levels of pre-dividend cut. If we talk about the percentage, the total average annual growth over the same period has been about 24%. Looking at the average annual growth in isolation can be misleading here as the company has not increased its quarterly dividends since May 2011.

The company seeks to use its available cash in order to develop and enhance its position in the capital-intensive semiconductor market while at the same time manage its cash resources to reward its shareholders. At the moment, STM pays an annual dividend of $0.40 per share, yielding 4.40%. During the last year, the company paid cash dividends of $350 million.

Moving on to the payout ratio - the payout ratio based on earnings has improved for STM over the last year. Earnings have been volatile for the company over the last five years; however, STM has managed to keep its dividends stable. The volatility in the earnings has caused the cash flows from operations to fall for the company over the last few years. The company has tried to manage its cash flows by cutting research and development expenditures by approximately 25% during the last year. A comparison of STM's dividend with two of its peers, Intel Corporation (NASDAQ:INTC) and Texas Instruments (NASDAQ:TXN), is presented in the table below.

Dividends per Share

Average growth in five years

Dividends Paid (Billions)

Operating Cash Flows (Billions)

STM

$0.40

24%

$0.350

$0.366

Intel

$0.90

13%

$4.47

$20.76

Texas Instruments

$1.20

25%

$1.17

$2.97

Click to enlarge

Source: Morningstar

As evident from the table, the dividend growth of STM is better than Intel, but the stock lags behind TXN. The cash flows of the company has suffered heavily over the last three years due to the overall condition of the sector and the company's failed partnership with Ericsson. STM is trying to further manage its capital expenditures in order to enhance its free cash flows. The company spent $635 million in capital expenditures over the last year, which is expected to come down to $510-550 million in 2014.

Future Prospects

Despite the recent turbulent times seen by the semiconductor industry; the long-term prospects remain bright. The companies are trying to enhance growth by different measures such as, strategic partnerships and joint ventures. STM allocates substantial funds to the research and development as well as capital investments in front-end and back-end manufacturing facilities. Also, the company derives a major portion of its revenue from the automotive industry, which could be a key growth driver, since the automotive industry has been performing well. The company claims to be the world's third largest chip provider in that category. Moreover, STM could derive growth from the embedded processing segment, which enabled the company to lead the industry by producing micro-controllers for multiple consumer electronics.

Another growth driver for STM will be the expertise in nano-technology named: MEMS - Microelectomechanical systems. At the moment, STM is the largest supplier of microelectronics and MEMS. According to the company, the global demand for MEMS related devices should reach 60-70% by 2020. If the estimates are correct, there is a huge opportunity for STM to benefit in the medium-long term.

Conclusion

STM has been through some tough times; however, more recently, the company is making a solid turnaround and the stock has gained substantially. In addition, the income component of the stock is extremely attractive. We believe as the company starts to grow its cash flows again through the growth opportunities mentioned above, the cash dividends will also grow. STM will be a solid investment for both dividend and growth investors over the long term

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.