I was looking for a formula to create a large-cap dividend stocks portfolio that can outperform the market by a significant margin on the long run. After many trials, I have found out that a portfolio of 20 S&P 500 companies yielding more than 2% a year and having the highest Research & Development Expense to Revenue ratio is giving excellent results.
I used the Portfolio123's screener to perform the search and to run back-tests according to these conditions. After running this screen on June 11, 2016, I discovered the following twenty stocks, which are shown in tables below. In this article, I will focus on the third ranked company, Xilinx (NASDAQ:XLNX).
The table below presents the Research & Development Expense TTM, the Revenue TTM and the R&D to Revenue ratio, for the twenty companies.
In my view, at the current price XLNX is an excellent investment opportunity for the long term. According to the company, it is the world's leading provider of All Programmable FPGAs, SoCs, MPSoCs and 3D ICs, enabling the next generation of smarter, connected, and differentiated systems and networks. Driven by the industry-wide shifts towards Cloud Computing, SDN/NFV, Video Everywhere, Embedded Vision, Industrial IoT, and 5G Wireless, Xilinx's innovations enable these applications that are both software defined yet hardware optimized. As I see it, those areas are poised to show substantial growth which will continue to benefit the company.
Source: Company's website
On April 27, Xilinx reported its fourth quarter fiscal 2016 financial results, which beat earnings-per-share expectations by $0.02 (3.85%). The company posted revenue of $571.1 million for the period, also surpassing the consensus estimate of $566.4 million. Xilinx has shown earnings-per-share surprise in three of its last four quarters, as shown in the table below.
Data: Yahoo Finance
In the report, Moshe Gavrielov, Xilinx's President and Chief Executive Officer, said:
Momentum from our new products continued in the fourth fiscal quarter of 2016 with sales from 20nm products significantly exceeding $25 million and sales from the 28nm product family achieving record levels. Although fiscal 2016 experienced volatility from the wireless communications segment, Xilinx delivered its third consecutive generation of products to market ahead of the competition, enabling substantial PLD share gains. Additionally, our consistent and robust profitability enabled Xilinx to increase its dividend for the eleventh time since initiating the program in 2004.
In my view, the fact that Xilinx continued to show strong momentum in new product sales, which constituted almost half of total revenue in the recent quarter and increased 20% year-over-year is very encouraging. The company is well positioned to benefit from a secular technology replacement cycle from ASICs (application specific integrated circuits) to the programmable logic device [PLD] chips that it produces. As chips get smaller, they become more expensive to produce and uneconomical for limited applications. Thus, the long-term trend is for the programmable logic device.
Xilinx utilizes manufacturing process technologies that enable the PLD to increase functionality. Generally, the smaller the process technology, the higher the chip's performance and density and the lower the power consumption. According to the company, its highly successful 20nm Ultrascale family approached $100 million in sales in fiscal 2016, surpassing the company's forecasts in every quarter of the fiscal year. This family, which includes the PLD industry's only high-end family, is receiving adoption in a broad base of applications including wired and wireless communications, test & measurement, industrial and defense applications.
Balance Sheet, Dividend and Share Repurchase
Xilinx has a strong balance sheet. At the end of the fiscal year 2016, the company had cash and cash equivalents of $3.34 billion and total debt of $1.58 billion. The total debt to equity ratio was at 0.61.
Along with its fourth-quarter earnings release, Xilinx declared a quarterly cash dividend of $0.33 per outstanding share of common stock, an increase of 6.1% from the previous dividend of $0.31 per share. Xilinx increased its dividend for the eleventh time since initiating the program in 2004. The annual dividend yield is pretty high at 2.82%, and the payout ratio is at 57.9%. The annual rate of dividend growth over the past three years was high at 12.1%, over the past five years was also high at 14.1%, and over the last ten years was very high at 16%.
During fiscal 2016, Xilinx paid its shareholders a record $319 million in dividends and repurchased 9.7 million shares for $443 million. Xilinx has returned 100% of operating cash flow to stockholders in the form of dividend and share repurchase over the past ten years.
On May 16, Xilinx announced that its Board of Directors has authorized the repurchase of up to an aggregate $1 billion of the company's debt and equity securities. In the past five years, the company has repurchased approximately 43 million shares of common stock for approximately $1.8 billion. Timing of repurchases and exact number of shares of common stock to be purchased will depend upon prevailing market conditions and other factors.
Since the beginning of the year, XLNX is down 0.5% while the S&P 500 Index has increased 2.6%, and the Nasdaq Composite Index has lost 2.3%. Moreover, since the beginning of 2012, XLNX has gained only 45.8%. In this period, the S&P 500 Index has increased 66.7%, and the Nasdaq Composite Index has risen 87.9%.
XLNX Daily Chart
XLNX Weekly Chart
Chart: TradeStation Group, Inc.
XLNX's valuation is pretty good, the quick ratio is very high at 4.0, the trailing P/E is at 22.8, and the forward P/E is at 19.97. The price to free cash flow is at 31.39, and the Enterprise Value/EBITDA ratio is low at 13.68.
In addition, XLNX's Margins and Return on Capital parameters have been much better than its industry median, its sector median and the S&P 500 median as shown in the tables below.
In my view, Xilinx is well positioned to benefit from a secular technology replacement cycle from ASICs to the programmable logic device chips that it produces. In my opinion, the fact that Xilinx continued to show strong momentum in new product sales, which constituted almost half of total revenue in the recent quarter and increased 20% year-over-year, is very encouraging. XLNX's valuation is pretty good, the quick ratio is very high at 4.0, and the EV/EBITDA ratio is low at 13.68. Moreover, the company is generating high cash flow and returns substantial capital to its shareholders by stock buyback and increasing dividend payments, currently yielding 2.82%. As I see it, at the current price Xilinx stock is an excellent investment opportunity for the long-term.
In order to find out how such a screening formula would have performed during the last two years, last ten years and last seventeen years, I ran the back-tests, which are available by the Portfolio123's screener.
The back-test takes into account running the screen once a year and replacing the stocks that no longer comply with the screening requirement with other stocks that comply with the requirement. The theoretical return is calculated in comparison to the benchmark (S&P 500), considering 0.25% slippage for each trade and 1.5% annual carry cost (broker cost). The back-tests results are shown in the charts and the tables below.
Two years back-test
Ten years back-test
Seventeen years back-test
The dividend stocks screen has given much better returns during the last two years, the last ten years and the last seventeen years than the S&P 500 benchmark. The Sharpe ratio, which measures the ratio of reward to risk, was also much better in all the three tests.
The two years return of the screen was at 15.89%, while the return of the S&P 500 index during the same period was at 7.53%. The difference between the dividend screen to the benchmark was even more noticeable in the 17 years back-test. The 17-year average annual return of the screen was at 11.68%, while the average annual return of the S&P 500 index during the same period was only 3.11%. The maximum drawdown of the screen was only 38.17%, while that of the S&P 500 was at 57%.
Although this screening system has given superior results, I recommend readers use this list of stocks as a basis for further research.
Disclosure: I am/we are long CSCO, INTC, KLAC, MCHP.
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.