Semiconductor Stock Valuation Highly Correlated with Dividends

Analysts at Jefferies pointed out an interesting connection between semiconductor stocks valuations and dividends. According to analyst Mark Lipacis, there is a 45 percent correlation between cash adjusted P/E and dividend payouts in semis.

Lipacis called the relationship between valuation and dividends intuitive, but he was surprised by the high degree of correlation he observed during his analysis. He thinks it could be indicative of the industries maturity and the uncertain macro environment.

The information can be translating this into an investment thesis by observing dividend growth. Lipacis thinks Avago Technologies Limited (Nasdaq: AVGO) and Marvell Technology Group Ltd. (Nasdaq: MRVL) have the highest probability of a large dividend increase since they both have healthy free cash flow growth and low dividends relative to cash flow. Broadcom Corp. (Nasdaq: BRCM) and Altera Corp (Nasdaq: ALTR) could also see healthy dividend increases.

Market Vectors Semiconductor ETF (NYSE: SMH) is higher by 3 percent in the past 30 days, but has underperformed year-to-date. Jefferies has buy ratings on AVGO, MRVL, BRCM, and ALTR.

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