What better way to end a highly forgettable year than by buying stock that will pay you dividends? In fact, Broadcom (NASDAQ: AVGO), Orange SA (NYSE: ORAN), and Applied materials (NASDAQ: AMAT) are in top shape, so no matter what lies ahead for the stock market in 2021, these companies look like a solid bet to earn some passive income. This is why our Fool.com contributors think so.
A chip giant following a new hardware upgrade cycle
Nicholas Rossolillo (Broadcom): When it comes to semiconductor stocks, recessions can be tough times. But COVID-19 did not cause an ordinary recession. While not all chip stocks were immune to side effects, technology has been in high demand for the past year as organizations rushed to continue operations and stockpiled consumer electronics to spend some extra time at home.
Given the circumstances, Broadcom, the network equipment giant, had a reasonably good year. Sales increased 6% year over year during the company’s fiscal year 2020, including a 12% increase in fourth quarter sales to $ 6.5 billion. Infrastructure software led the way, consisting of Broadcom’s acquisition of data center network management outfits Brocade, CA Technologies and most recently Symantec’s Enterprise Security, the remains of which are now NortonLifeLock (NASDAQ: NLOK). Chip sales fell by 1% over the full period of the year, but increased by 6% in the fourth quarter Apple‘s (NASDAQ: AAPL) iPhone 12 and other 5G mobile applications are bringing Broadcom’s bread and butter back to growth mode.
Even better than the revenue growth, however, was Broadcom’s solid execution in refining its operations to increase profitability. Free cash flow (revenues minus operating costs and capital expenditures) was up 25% to $ 11.6 billion in 2020. That’s ample positive free cash flow to cover the dividend (which Broadcom paid only $ 5.53 billion in the past 12 months). has cost) and repay its long-term debt of $ 40.2 billion (long-term debt peaked at $ 45.0 billion at the end of the second quarter).
Even after an increase of about 34% in 2020 so far, stocks are quite affordable at only 15.4 times the 12-month free cash flow. Add to that the manageable 3.4% annual dividend yield Broadcom pays, and I say this remains a solid pampering buy with 2021 around the corner.
Try a fiber-rich orange diet with a side of massive dividend yields
Anders Bylund (Orange): French telecom company Orange SA may not be the first dividend game to come to mind in today’s market, despite its generous 5.8% return. The company will not be joining Dividend Aristocrats’ exclusive club any time soon, as Orange is not afraid to cut its payouts when the money can be better used elsewhere. This attitude is a big turnoff for many US income investors, who expect an unbroken string of annual payouts. However, occasional dividend cuts are common practice in overseas markets such as Europe and Asia.
That said, Orange recently increased its semi-annual payout from $ 0.30 to $ 0.40 a share at a time when many rivals are cutting their payouts to save their previous money. The management team is encouraged by rising revenues and strong cash flows in 2020. Looking ahead, the company continues to expand its global footprint of mobile network services. In addition, CEO Stephane Richard expects Orange’s heavy investments in fiber optic network infrastructure to bear fruit in the coming years.
“When I look at the European telcos, Orange is the fiber supply. Orange is the company that gives top priority to fiber,” said Richard at an industry conference in September. “Today we have the Orange fiber footprint in Europe, which is higher than the total of the three other major European telecom companies.”
This is important, because Richard expects a broad market shift in this direction.
“So we are the ones who, in my opinion, have prepared in the best way for what will be the next generation of fixed broadband networks around the world that will be fiber to the home,” continued the CEO.
Orange should be able to deliver higher average revenues per user as the entire telecom industry seeks to catch up with this company’s market-leading assets and services.
Ultimately, Orange’s dividend is driven by massive cash flows generated by an ambitious global growth strategy. Lock that attractive dividend yield at the low valuation of 10 times trailing earnings and sit back to collect both soaring stock prices and fantastic dividend checks over the next few years.
Essential machines for a connected future
Billy Duberstein (applied materials): The stock of Applied Materials is already up 47% from the year before. But you know what? It’s still one of the best deals in technology. Applied is the largest semiconductor device manufacturer by revenue, with an extensive product portfolio that includes etching, deposition, metrology, and inspection tools for both semiconductor and memory chip fabrication. As such, it is poised to take advantage of any increased semiconductor manufacturing expenditure.
That scenario certainly seems likely. According to SEMI, the Global Association of Semiconductor Industries, the amount of spending on semiconductor equipment is projected to grow 16% this year to $ 68.9 billion and then continue to rise to $ 71.9 billion in 2021 and then $ 76. 1 billion by 2022. The semiconductor equipment industry is known to be cyclical, so some find these estimates too optimistic. But it’s also why Applied Materials is so cheap compared to the rest of the tech sector, with just 18 times next year’s earnings expectations. And while the 1% dividend may not turn many heads, Applied’s payout ratio is very low at just 22%, leaving plenty of room for dividend growth and stock buybacks.
There is also reason to believe that the industry could become more of a consistent growth sector, as SEMI predicts. Across the industry, large semiconductor foundries are rushing to catch up Semiconductor manufacturing in Taiwan (NYSE: TSM) in power. For example, Samsung recently announced a spending plan of $ 116 billion for years to come to catch up with outsourced foundry operations.
And it’s not just companies that compete, but countries too. China is still hoping to grow its domestic chip business, and the US has just passed legislation that will provide incentives and subsidies to domestic chip production on US shores. All these entities vying for the supremacy of chips will have to buy loads of Applied machines.
In addition, the NAND flash industry is currently recovering from a down year in 2019, with five major competitors racing to create the most efficient storage chips. Finally, the DRAM industry, which has seen two consecutive years of declining spending during the trade war, appears to be finally ready for a 2021 recovery.
As chips have become smaller and more sophisticated, production is currently reaching the limits of Moore’s Law, which predicts that the number of transistors per chip will double every one to two years. As we have seen, this is becoming more and more difficult to implement. However, the very complex and difficult nature of chip manufacturing only makes it more important to manufacturers of equipment such as Applied Materials. That makes the stock a solid buy for 2021, even after its impressive 2020.