- Linear Technology is likely to be the next Dividend Aristocrat.
- Dividend Aristocrats are ultra-stable businesses with long histories of rising dividends.
- However, Linear Technology stock is overpriced for its mediocre growth
What is Dividend Aristocrat Index and why does it matter? The Dividend Aristocrats Index is comprised of just 50 businesses that have:
1. Increased their dividend payments for 25+ consecutive years.
2. Are members of the S&P 500.
3. Meet certain size and liquidity requirements.
Dividend Aristocrats are ultra-stable businesses with long histories of rising dividends.
Here’s why it matters: The Dividend Aristocrats Index has outperformed the S&P 500 by over 3 percentage points a year over the last decade. That’s a sizeable difference. There are very few technology companies that are also Dividend Aristocrats. That’s because the technology industry changes so rapidly.
Linear Technology (NASDAQ:LLTC) will likely become a Dividend Aristocrat in 2017 (Click here to see the other 3 companies that will soon join the index). The company will join the Dividend Aristocrats index soon because it has increased its dividend payments for 24 years in a row.
Linear Technology increases its dividend payments in February each year. The company will be eligible to become a Dividend Aristocrat in February of 2017 - less than 1 year from now. Linear Technology is a relatively young company in comparison to other Dividend Aristocrats. The company was founded in 1981.
Linear Technology designs, manufactures, and markets integrated circuits. The company’s products are purchased by customers in the telecommunications, industrial, personal computing, and automobile industries.
Linear Technology has a very safe balance sheet:
- Linear Technology has no debt at all
- Linear Technology has cash of $1.3 billion
Its cash hoard could be used for growth creating acquisitions in the future. And the shareholders should hope so as growth over the last decade has been mediocre. The company has a compounded earnings-per-share growth of 5% a year over the last decade. Earnings-per-share of $2.12 in fiscal 2015 is still well below the high of $2.50 reached in 2011.
More than half of the company’s eps growth in the last decade has come from share repurchases and not from revenue growth or profit margin expansions. Share repurchases have accounted for 2.6 percentage points of the 5% average earnings-per-share growth Linear Technology experienced over the last decade. Without share repurchases, the company would be growing just slightly faster than inflation. When a company is barely keeping pace with inflation it shows that the business is not gaining any ground on its competitors.
The company is struggling to compete in the semiconductor industry. The industry is filled with larger corporations than Linear Technology, who have managed to gain larger market share than the company. It will be tough for Linear Technology to experience rapid growth in the increasingly competitive semiconductor industry.
The global growth slowdown and low oil prices have impacted the company’s customers. This in turn, has further impacted earnings at Linear Technology.
Excellent balance sheet does give the company room to make an acquisition that could propel growth. Whether this occurs or not is yet to be seen. While earnings-per-share is not growing rapidly, Linear Technology does have an above average 3% dividend yield. If the company can continue to compound its earnings-per-share at 5% a year going forward by leveraging its balance sheet then investors can expect a total return of 8% a year from dividends and growth.
The S&P 500 has averaged total returns of around 9% a year over the long run. Linear Technology expected total returns are around average. For a company to be a good investment and have average expected total returns, it needs to be trading at a fairly low valuation multiple.
Unfortunately, that isn’t the case with Linear Technology. The company's stock is currently trading at a price-to-earnings ratio of 21. The company appears somewhat overvalued at current price given its mediocre growth prospects.
Linear Technology does not rank particularly high using The 8 Rules of Dividend Investing due to its mediocre growth and total return prospects and fairly high valuation. Other Dividend Aristocrats make a more favorable purchase at current prices.