Microchip Technology Inc: A Dividend Idea In The Semiconductor Space

We continue to look for high quality dividend growth ideas in a low interest rate environment. Today we will analyze Microchip Technology Inc. (NASDAQ:MCHP) and determine if this is a quality dividend idea for your portfolio. Microchip is expected to report third quarter earnings on November 11th,2012.

A Quick Look At Microchip Technology Stock:

The stock trades at around $32, versus its 52-week range of $30.23-$38.87. It trades at a P/E multiple of 15.7 times and a forward P/E of 13 times. The stock yields 4.4%. Others stocks in its peer group such as Linear Technology Corporation (NASDAQ:LLTC) yields 3%, Intel Corporation (NASDAQ:INTC) yields 4%, and Analog Devices, Inc. (NASDAQ:ADI) yields 3.2%.

Fundamentals That Support a Strong Dividend Growth Story

1. Microchip has a strong balance sheet with $780 million in cash and cash equivalents, and long-term debt of $357 million in the form of JuniorConvertibles due 2037. Additionally, the company has a $750 million credit facility, which remains unused as of June 30th, 2012.

2. As per management, the SMSC integration is expected to accrete$0.32 in 2013. The synergies are expected to have a positive impact on top line growth.

3. The company’s 16-bit and 32-bit businesses have shown qtr/qtr growth, positioning itself to capture market share

4. Microchip has continued to grow its dividend per share through the years with a current payout of 35.1 cents

5. Microchip has a history of generating strong cash flow. During the announcement of Q1-2013 results, management stated that net cash generation during the September quarter will be approximately $100million prior to dividends and acquisition activities.

We conclude by saying that Microchip Technology has several long-term positive catalysts, which support a dividend growth story. Additionally, a strong balance sheet, and cash flow generation provide a floor for the stock. The risk in investing in Microchip remains acquisition integration issues, continued macro weakness, and loss of market share.

This article was originally written by Sabina Bhatia, and posted on Kapitall.