AMD has had some recent market share gains against some competitors, as InvestorPlace’s Thomas Niel recently reported in his article on Oct. 17. I am persuaded by a good number of his arguments about AMD stock being overvalued.
In addition to his arguments, investors should consider that AMD stock is at a severe disadvantage compared to its peers. AMD does not pay dividends and buy back its stock. It cannot afford to do these things.
Most of AMD’s peers in the semiconductor sector reward shareholders with these two types of return-of-capital payments. So, in effect, AMD has a 0% total yield.
Total yield is the full amount of return-of-capital payments made by a company, divided by the market value of the company. It is equal to dividend yield plus buyback yield.
Competitors Pay Dividends and Repurchase Shares
Qualcomm (NASDAQ:QCOM) stock has a 3.1% dividend yield, which represents over 71% of its net income. In addition, QCOM bought back $22.5 billion worth of its common stock outstanding over the past 12 months.
Given that QCOM stock has a market value of $95.9 billion, this represents an incredible buyback yield of 23.5%. So the total yield from return of capital payments (dividend yield of 3.1% plus buyback yield of 23.5%) for QCOM stockholders is an amazing 26.6%.
Nvidia (NASDAQ:NVDA) stock has a smaller 0.3% dividend yield. This represents just a 9.6% payout of its net income. But NVDA also has bought back $2.6 billion of its common stock over the past 12 months.
This represents 2.2% of NVDA stock’s market value. So its total yield is 2.5% (dividend yield of 0.3% plus buyback yield of 2.2%).
Intel (NASDAQ:INTC) stock has a 2.5% dividend yield. Its dividends represent 28.7% of its net income. But, in addition, INTC has bought back $10.5 billion of common stock in the past 12 months.
This represents 4.6% of its $230.7 billion market value. So, combining the dividend and buyback yields, the total yield for INTC stock is 7.1%. This helps make INTC very attractive to investors.
AMD’s Financials are Turning Around
Last month I wrote that AMD’s financials are likely to lead to a positive free cash flow report for Q3 2019. If that occurs, there will likely be pressure on management to consider matching the return of capital payments that its peers make.
AMD stock has been propelled by this financial turnaround. It may be that if AMD becomes free cash flow positive it will consider either paying a dividend, buying back AMD stock or a combination of both.
I suspect that management will likely make this change at the end of the year if the company posts two full quarters of positive free cash flow. Most companies make major announcements like this at the end of their financial year.
The Bottom Line on AMD Stock
AMD stock’s lack of dividend puts it a disadvantage to its competitors, as noted above. INTC, QCOM and NVDA all have lower price-to-earnings ratios. In fact, Intel’s forward P/E is only 12 times, less than half that of AMD stock.
Moreover, as I have pointed out here, AMD’s peers have share repurchase programs. AMD does not buy back its stock. As I pointed out above, it has negative free cash flow and cannot afford to do so.
In short, AMD does not have the financial health and capital returns that INTC, QCOM and NVDA offer investors. AMD stock also does not have as compelling value metrics as its peers.
AMD will report its earnings on Oct. 29. Investors should look very carefully at whether or not it produces free cash flow. The reason is there will likely be no return of capital payments from AMD stock until it does. This is a significant reason why its peers in the industry are much more attractive at this point.
As of this writing, Mark Hake, CFA, does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here. The Guide focuses on high total yield value stocks and other deep value characteristics. Subscribers receive a two-week free trial period.