Microchip Technology Is Predictable and That’s Not Bad

With a climb of over 10% in June, Microchip Technology (NASDAQ:MCHP) is within striking distance of turning positive for the year. This nice run-up has created a quandary for investors looking to invest in MCHP stock. Do they jump in with the possibility that the stock is overvalued? Or do they have confidence in the company’s forecast for steady, but unspectacular growth.

Microchip Technology Is Predictable and That’s Not Bad
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The tiebreaker here may be the company’s dividend. A 1.4% dividend yield may not be much to get investors excited. But Microchip has shown an ability to grow this dividend every year for the last 18 years. It’s that kind of predictability that may be just the tonic that investors are looking for with a market that is getting more unpredictable every day.

MCHP Stock Is Solid, But Not Splashy

Microchip Technology is a manufacturer of microcontroller, mixed-signal, analog and flash-IP integrated circuits. And if you don’t necessarily understand what that means let me put it simply. They make devices for things you use every day like programmable coffee makers. But as Thomas Niel points out, the company is also expanding into areas that are becoming a large part of our future, like electric cars.

In its last quarter, Microchip made it 18 consecutive quarters that it has exceeded analysts’ expectations for earnings per share. And while the story for revenue has been a bit more hit-miss, the overall message is consistent with a solid, but not splashy tech stock.

However, like all companies, the Covid-19 pandemic has significantly impacted Microchip’s business. On the earnings call, Ganesh Moorthy, President & COO described this period as “a very unique cycle.” Moorthy expanded on his comments by describing this as the first time the company has ever experienced both a supply shock and a demand shock.

The Novel Coronavirus Continues to Be Disruptive

On June 30, the United States leading expert on infectious diseases, Dr. Anthony Fauci, lamented to a Congressional committee that daily new cases of the novel coronavirus could reach over 100,000 a day unless the U.S. gets the virus under control.

Of course, the dire warnings are predicated on the spike in new cases caused by a number of factors. But undoubtedly, it’s a reminder that the novel coronavirus is in fact a virus, and a new one at that. This means that many businesses are crossing a canyon without a net.

And that is building uncertainty into the market. It still appears unlikely that the entire country will go on lockdown. However, several states are taking steps to roll back certain reopening measures.

Microchip’s Dividend Seems Safe

According to chairman and chief executive officer Steve Sanghi, Microchip’s dividend is “very, very safe.” In saying this, Sanghi goes back to 2009 when the company didn’t cut its dividend despite having its revenue decline by nearly 36%.

Sanghi says the company is far more profitable today and has conducted its own internal stress tests that mean the company could lose a “very, very large amount of sales” and it would still be cash flow positive.

Over the past 10 years, Microchip’s dividend has grown from $1.36 to $1.47. While this growth of less than 1% a year is not spectacular, it’s the kind of slow and steady growth that investors can find predictable. And right now, predictable is not bad.

Know What You’re Buying

Microchip Technology is not a growth stock. The company’s annual growth has consistently lagged the market. But the company makes up for that with a steady dividend that the company pledges to be safe.

The way I see it, if the economy has a robust recovery, an investment in MCHP stock may reward you with some modest growth and certainly with an increasing dividend. Analysts rate the stock as a buy with a price target that suggests the modest growth I mentioned.

And if the economy has sluggish growth, your investment will still allow you to collect a predictable dividend. The stock isn’t cheap, but if you’re looking for a safe port in a possible storm, there are worse options.

Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/07/mchp-stock-benefits-from-being-predictable/.

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