There is much to like NVIDIA (NASDAQ: NVDA). The graphics specialist is seeing a quarterly growth, thanks to solid demand for chips in various industries such as PC games, self-driving cars, virtual reality and cloud computing. However, the corporate dividend is one area where NVIDIA has no big time.
A great miser
NVIDIA's dividend yield at the current share price is a meager 0.22%, well below the industry's average dividend yield of 1.11%. Some might argue that the company's dividend yield has declined thanks to its rapid share price movement; The share has jumped more than 1,700% since the beginning of the dividend payment at the end of 2012.
But that can not be an excuse, as NVIDIA's profits and free cash flow have increased tremendously over the years and it has worked well to keep costs under control.
NVIDIA has been extremely dedicated to the dividend. The quarterly payout was $ 0.075 per share when it began paying a dividend six years ago, which has now risen to just $ 0.15 per share. Because the chip manufacturer increases its dividend extremely slowly. The payout was increased by just 7% in November 2017, when it paid a quarterly dividend of $ 0.14 per share.
NVIDIA added just a penny to the quarterly dividend, although there was a steady record of quarterly earnings growth. Of course, NVIDIA is still a growth company looking for opportunities in the fields of artificial intelligence and self-driving cars. Therefore, it makes sense for the company to save money to cope with potential dangers. But there is enough money and an increased dividend.
With a net cash position of nearly $ 6 billion and strong earning power, NVIDIA could increase its dividend slightly.
Why can NVIDIA easily pay a higher dividend?
NVIDIA posted a net profit of $ 2.3 billion for the first six months of the current fiscal year, paying only $ 182 million in dividends, meaning that not even 8 percent of the dividend profit was attributable to dividends. Meanwhile, it has generated $ 2.1 billion in free cash flow over the same period, so it does not spend much of its free cash flow on the dividend.
NVIDIA's $ 655 million of share repurchases in the first half of the current fiscal year, as well as dividends paid, resulted in nearly $ 1.3 billion in free cash flow. NVIDIA would not even have to work up a sweat if it trebled the dividend. For example, if NVIDIA pays an annual dividend of $ 1.80 per share, the annual dividend payout will be just over $ 1 billion and the term stock dividend yield would rise to 0.67 percent.
The company could easily cover this dividend amount with the free cash flow it already generated in the first half of the current fiscal year and still have plenty left to use for expansion, debt reduction or other purposes. In addition, thanks to the solid catalysts on which it sits, NVIDIA is in a solid position to further improve earnings and free cash flow.
Should NVIDIA increase its dividend?
PC gaming delivers most of NVIDIA's revenue. This business delivered nearly 58% of its revenue in the last quarter, up 52% year-on-year. It is very likely that, thanks to NVIDIA's dominance, this business will continue to grow at an impressive pace as it controls nearly 70% of the market for discrete GPUs (Graphics Processing Unit).
Similarly, NVIDIA's data center business has the potential to grow at a rapid pace due to the rapid expansion of the overall addressable market. NVIDIA is constantly improving its offerings to stay up to date in these fast-growing markets, and yet it has kept its costs under control.
Over the years, the company has been able to compete successfully against the competition and has established a solid position in the markets in which it operates. Therefore, NVIDIA should not have much difficulty increasing its dividend, because even if it does so, it will have enough money in the bank to counter a potential threat.
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