Featured Stock In January’s Safest Dividend Yields Model Portfolio

Figure 1: LRCX’s Revenue and Profit Growth Since 2008

 

Sources: New Constructs, LLC and company filings

LRCX’s Free Cash Flow Supports Dividend Payments

After initiating quarterly dividends in 2014, LRCX has increased its quarterly dividend payment every year, from $0.18/share to $1.10/share in 2018, or 57% compounded annually. This increase in dividend payments has been supported by LRCX’s free cash flow. From 2015 to 2018, LRCX generated a cumulative $5.5 billion (21% of market cap) in FCF while paying $857 million in dividends.

Companies with strong free cash flow provide higher quality dividend yields because we know the firm has the cash to support its dividend. On the flip side, dividends from companies with low or negative free cash flow cannot be trusted as much because the company may not be able to sustain paying dividends.

Figure 2: LRCX’s FCF vs. Dividends Since 2015

 

Sources: New Constructs, LLC and company filings

LRCX Remains Undervalued

At its current price of $173/share, LRCX has a price-to-economic book value (PEBV) ratio of 0.8. This ratio means the market expects LRCX’s NOPAT to permanently decline by 20%. This expectation seems pessimistic given that LRCX has grown NOPAT by 22% compounded annually since 2008.

If LRCX can maintain 2018 NOPAT margins (28%) and grow NOPAT by just 5% compounded annually for the next 10 years, the stock is worth $304/share today – a 76% upside. See the math behind this dynamic DCF scenario.

Critical Details Found in Financial Filings by Our Robo-Analyst Technology

As investors focus more on fundamental research, research automation technology is needed to analyze all the critical financial details in financial filings. Below are specifics on the adjustments we make based on Robo-Analyst findings in LRCX’S 2018 10-K:

Income Statement: we made $948 million of adjustments with a net effect of removing $746 million in non-operating expenses (7% of revenue). See all adjustments made to LRCX’s income statement here.

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Disclosure: David Trainer, Andrew Gallagher, Kyle Guske II, and Sam McBride receive no compensation to write about any specific stock, style, or theme.

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