Inside Wall Street: A dividend play in wireless, autos

A familiar tech name is gaining not only from rising payouts but from expanding global sales and profit growth.

By Gene Marcial May 9, 2013 1:17PM

Global communication copyright Maciej Frolow, Brand X, Getty ImagesWith the market now catapulting almost every week to record highs, people paid to predict the market's direction invariably see a sharp pullback ahead. But whether or not the market continues to advance or steps on the brakes, one way to avert a crash in stock portfolio value is to play not only defense but offense. 

 

Most investors flock to dividend-paying stocks in times of doubt or market volatility. But this time the savvy pros are doing something different: They are seeking refuge not only in defensive dividend-paying stocks, but in high-dividend "aggressive" companies, where they foresee improving earnings and sales growth.

 

"The more defensive names have had a very good run over the last few years and have gone from being very cheap to reasonably priced," notes Joseph Hunt, a principal at Northwestern Criterion Asset Management. That has pushed the firm, he says, to look for companies with not just steady dividends but a greater potential for revenue growth plus price appreciation.

 

The technology sector is peppered with such stocks. One of them is an old brand name: Analog Devices (ADI), a leading supplier of analog chips to a wide array of businesses, including those proficient in building wireless infrastructure, automotive manufacturing, and industrial controls.

 

More specifically, Analog Devices designs and makes high performance analog, digital, and mixed-signal processing integrated circuits (ICs) for the industrial, communications, automotive, and consumer markets.

 

Analog's big appeal isn't just that it pays a yearly hefty dividend of $1.36 a share, or a 3% yield, but an expectation that two robustly growing markets will propel revenue and profit growth: wireless infrastructure business and the automotive industry. 

 

"We are optimistic about the prospects for global growth, so we think this sort of rotation in our dividend portfolio makes a great deal of sense," argues Hunt. He expects the widening global construction of wireless infrastructure will be a big source of business for the company.

 

In particular, the emerging markets continue to be promising, he says, and although they already have shown significant growth as a market for cell phones and mobile devices, 75% of the world's population is still on2G while much of the developed world is already operating on 4G devices.

 

People living in developed countries have seen an explosion in the demand for data transfers, including photos, videos, and music, and apps, on wireless devices. New cars that are being produced will also be a source of such growth, notes Hunt. Having risen from the ashes, the auto industry is adding numerous features and accessories on cars that are more sophisticated, requiring more sensors and chips.  

 

"Analog Devices is well positioned to accommodate these developments which will provide a steady market for the company's array of products suitable not only for expanded communications but for entertainment, as well," says Hunt.

 

With earnings that might approach $3 a share by the end of 2014, he sees Analog Devices jumping to $60 a share. The company is expected to earn about $1.16 a share in 2013, up from 2012's $2.13.

 

The stock, which climbed to a 52-week high of $47.27 a share in February 2013 from $34 about a year ago, is currently trading at $46. With the stock hitting $60, combined with its current dividend yield of 3%, it produces an annualized total return of more than 15%, notes Hunt.

 

"Management has done a good job optimizing the business for the core industrial and automobile segments and its diverse customer base, while returning a significant amount of cash to shareholders," says Christin Armascost, an analyst at S&P Capital IQ, who rates the stock as a hold.

 

As the second largest U.S. analog company, "its revenues are highly correlated to global GDP growth, which we see improving," notes Armacost.

 


Gene Marcial wrote the column Inside Wall Street for Business Week for 28 years and now writes for MSN Money’s Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.




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