This AI Stock Just Raised Its Dividend by 15%, and More Passive Income Should Be Coming

While a few big semiconductor names tend to grab all the AI ​​headlines, the growing development of AI benefits the entire chip manufacturing ecosystem.

These include stockpiles of semiconductor equipment, tasked with producing higher volumes of increasingly complex chips. Amid high demand for more complex chips, revenue and profit will surely flow to these companies.

This is happening to a semi-cap equipment leader, which just announced a 15% increase in its quarterly payout.

Lam Research is gushing with cash and poised for growth

The chip manufacturing giant Lam Research (LRCX 2.97%) is one of several important players in the crucial etching and deposition steps of the chip manufacturing process. In particular, Lam specializes in equipment used to stack chip components in a vertical manner. This benefited the company when NAND flash switched from planar to stacked 3D structures a decade ago. Fortunately for Lam, both high-bandwidth DRAM and advanced logic chips now implement more 3D structures. And luckily, DRAM and advanced logic is where most of the AI-related growth is.

On the recent conference call with analysts, management highlighted several new products that provide advanced etching capabilities for new complex vertical structures for AI. CEO Tim Archer noted, “Overall, etching and deposition are becoming increasingly critical to meeting the complex semiconductor demands of a growing AI environment. We are excited about the multitude of opportunities we see ahead for the company, especially those created by technological inflections. – all-in-one, rear energy delivery, advanced packaging and dry EUV resistant processing.”

AI-fueled growth is also profitable for Lam

What’s particularly positive about Lam’s growth is that it also comes with high margin and cash flow, which is fueling the company’s growing dividend. Over the past 12 months, Lam has achieved an impressive operating margin of 30% and a return on equity of 45%. The margin is supported by Lam’s technological moat and the fact that it has limited competition, mainly only from Applied materials (AMAT 2.22%). Both Lam and Applied have similar values, showing reasonable prices. So it’s no surprise that Applied is also a terrific dividend growth stock.

Last Thursday, August 29, Lam announced that it would raise its quarterly payout by 15%, from $2.00 to $2.30, good for an annual dividend of $9.20. That’s a yield of about 1.12% at the current share price.

While a 1.12% yield may not seem like much today, 15% growth is a promising sign. If a company has the ability to raise its dividend above the rate of inflation for long periods, that stock could be a great long-term holding to provide sizable retirement income well into the future.

Image source: Getty Images.

Lam’s pay could grow by double digits for years

Like Applied, Lam has a low payout ratio of just 27.6%, meaning it pays out just over a quarter of its net income in dividends. While that’s not as low as Applied’s 15% payout ratio, it’s still a pretty low ratio with plenty of room to grow. Additionally, Lam’s current dividend yield is higher than Applied’s at 0.83%.

Lam’s earnings could also be cyclically lower now. Although Lam has seen excellent long-term growth over time, it is just now poised to break out of the recent cyclical downturn. Meanwhile, Applied had steadier earnings. The difference likely lies in Lam’s huge exposure to NAND flash investments, which has been thin in recent years following the pandemic.

LRCX EPS diluted (TTM) data by YCharts

But if Lam and Applied have similar long-term growth prospects, Lam’s earnings are more cyclically depressed and may have a harder time recovering. After all, the NAND recovery hasn’t happened yet, so as Lam experiences a NAND recovery combined with new AI growth opportunities in DRAM and advanced logic, its normalized earnings should rise.

This means that Lam’s higher payout ratio would be lower with more normalized earnings over the cycle.

Stock buybacks add fuel to the fire

Also, like Applied, Lam returns even more money to shareholders beyond dividends through share buybacks. Last quarter, Lam repurchased $373.5 million, more than the $261.4 million it paid out in dividends. And Lam has been even more aggressive with buybacks in the past when its share price was lower. For example, it repurchased $980 million in stock in the June 2023 quarter.

That’s a good allocation of capital right there, and so Lam has been able to reduce its share count by more than 10% since the end of 2019, all while maintaining a cash-rich balance sheet of $5.85 billion in cash, versus just $4.98 billion in debt.

Bottom line, a company with growing earnings, a declining share count, and a low payout ratio is a great recipe for lots of dividend growth going forward. Like peer-to-peer materials, Lam is poised to deliver just that for years to come, especially with AI tailwind behind it.