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There is a lot to love about NVIDIA (NASDAQ: NVDA). The graphics specialist is growing steadily, quarter after quarter, thanks to strong demand for chips in several markets, such as PC games, autonomous cars, virtual reality and cloud computing. However, the company's dividend is an area in which NVIDIA is sorely lacking in resources.
A big miser
The dividend yield of NVIDIA is 0.22% at current stock prices, well below the average dividend yield of the technology sector of 1.11%. Some might argue that the company's dividend yield has declined as a result of the rapid price appreciation of its shares; the stock has risen more than 1,700% since the start of the distribution of a dividend at the end of 2012.
But that can not be an excuse, as NVIDIA's earnings and free cash flow have grown significantly over the years, and it has also been helpful to control spending.
Total operating expenses (TTM) NVDA by YCharts
NVIDIA has been extremely stingy about dividends. Its quarterly payment was $ 0.075 per share when it began paying a dividend six years ago, now at $ 0.15 per share. Indeed, the chip maker is increasing its dividend at an extremely slow pace. In November 2017, the payment of quarterly dividends was $ 0.14 per share.
NVDA Dividend Data by YCharts
As a result, NVIDIA added only one cent to the quarterly dividend despite steady and dramatic growth in earnings quarter after quarter. Of course, NVIDIA is still a growth product looking for opportunities in the fields of artificial intelligence and autonomous cars. It is therefore logical that the company retains money to face potential threats. But there is enough money for that and an increased dividend.
With net cash close to $ 6 billion and strong earnings power, NVIDIA could easily increase its dividend.
Source of the image: Getty Images.
Why NVIDIA can easily pay a higher dividend
NVIDIA generated net income of $ 2.3 billion in the first six months of the current fiscal year and only paid dividends of $ 182 million. It therefore did not spend 8% of its profit on this dividend. Meanwhile, it generated $ 2.1 billion in free cash flow over the same period. It does not devote a large part of its free cash flow to dividends.
If we exclude stock repurchases worth $ 655 million made by NVIDIA during the first half of the current fiscal year, as well as dividends paid, there remained still free cash flow of nearly $ 1.3 billion. NVIDIA would not have to sweat even if it tripled its dividend. For example, if NVIDIA started paying an annual dividend of $ 1.80 per share, its annual dividend would be just over $ 1 billion and the dividend yield would drop to 0.67%. .
The company could easily cover this level of dividend with the free cash flow it generated during the first half of the current fiscal year, and it still has much to do for its expansion, debt reduction or any other purpose. judge fit. In addition, NVIDIA is well positioned to continue to improve its earnings and free cash flow through the solid catalysts on which it is built.
Should NVIDIA increase its dividend?
PC gaming provides the majority of NVIDIA's revenue. This business provided nearly 58% of its revenue in the last quarter and grew 52% from one year to the next. It is highly likely that this business will continue to grow at an impressive rate thanks to the dominance of NVIDIA, since it controls nearly 70% of the discrete GPU (graphics processing unit) market.
Similarly, the NVIDIA data center business has the potential to continue to grow at a breakneck pace due to the rapid expansion of the total addressable market. NVIDIA continues to upgrade its offerings to stay on top of these fast-growing markets and has been able to control costs.
Over the years, the company has managed to thwart competition and has established itself in the markets in which it operates. As such, NVIDIA should not have much trouble raising its dividend because even after that, it will have enough money in the bank to counter any potential threat.
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