On Aug. 2, Micron Technology (NASDAQ:MU) initiated a dividend program, signifying its confidence in its business, financial situation and outlook for the future. This is a really big deal. The last time Micron Technology paid a dividend was in 1996, or 25 years ago. I believe there is simply no question that this new dividend program will boost MU stock over the long term.
The reason is it is highly likely that Micron will both continue the program over time and also increase its dividend payment for shareholders. Micron is now very confident. Here is what management said about this new dividend:
“Micron’s remarkable transformation over the last several years has put the company in an outstanding position, with technology leadership, a robust product portfolio, enhanced profitability, and a strong, investment grade balance sheet.“
Why The Dividend Is Important
Micron Technology’s new dividend will help MU stock from falling out of bed as investors realize that there is an underlying yield on MU stock.
For example, Micron topped out at $95.59 on April 19, but since then has drifted lower. This is despite Micron reporting two good quarters of earnings and cash flow, including the latest earnings release on Sept. 28.
Now, Micron announced it was going to pay 10 cents per share on Oct. 18 to shareholders who owned MU stock as of Sept. 30. This implies a 40 cents annual dividend payment to shareholders. Since MU stock is at $70.64 as of Oct. 4, that gives it an annual dividend yield of 0.566%.
Micron has not yet released its 10-Q report (as of Oct. 4) for its final fiscal year quarter ending Sept. 2. However, the earnings release indicates that there were 1.138 billion shares used in the fully diluted calculation of earnings per share. Therefore, using this number, the 40 cents per share dividend will cost Micron Technology just $455 million (i.e., $0.40 x 1.138b shares).
That is not a very high cost for Micron. In fact, I suspect there is plenty of room for the company to increase this over time. Here is why.
Free Cash Flow
Micron has plenty of free cash flow (FCF) to afford the dividend. For example, the Consolidated Statements of Cash Flow in the earnings release indicate that Micron was producing more than enough FCF to pay for the dividend cost.
The line that says “Net cash provided by operating activities” (commonly known as Cash Flow From Operations or CFFO) was $12.468 billion in the year ending Sept. 2.
Next, we deduct the capex spending from the CFFO to derive FCF. This was $10.03 billion, seen in the next line that says “Expenditures for property, plant, or equipment.” As a result, FCF last year was $2.438 billion.
In other words, the dividend cost of $455 million over the next year, can easily come out of the $2.438 billion in FCF, assuming FCF doesn’t rise. But FCF is clearly likely to rise, especially if sales and earnings rise. So this is why I expect that the company will likely raise the dividend over time.
Buybacks and MU Stock Total Yield
In addition to the dividend payment for shareholders, Micron has been buying back its own shares over time. Here is what Micron said in the dividend announcement:
“The dividend augments the share repurchase plan that Micron announced in May 2018. Through its most recently reported quarterly results, Micron has returned approximately $4 billion in share repurchases…“
It has paid an average of just $42 per share for the buybacks. In the past fiscal year, the Cash Flow Statement shows that it spent $1.294 billion in share buybacks.
This results in a buyback yield that enhances the dividend yield. For example, if we divide $1.294 billion by the market cap of MU stock ($79.5 billion), the buyback yield works out to 1.628%. So if we add the 0.566% dividend yield to the 1.615% buyback yield, the total yield is 2.194%.
In other words now MU stock has a return of 2.19% from both buybacks and dividends. Now the net buyback yield will actually be a bit lower since some of the buyback money is spent to “sterilize” the issuance of new shares to employees through options and restricted stock. But we can expect that around 2% of the company’s market is returned to shareholders.
What to Do With MU Stock
But one thing is now clear: Micron Technology is highly confident in its balance sheet and cash flow situation. So much so that they have initiated a dividend on top of their share buyback program. As the company said in the subtitle of its announcement:
“Dividend demonstrates commitment to shareholders; marks major milestone in the New Micron transformation.”
Therefore, value investors might want to begin taking a stake in MU stock, with a view to average cost buying it should the stock fall. At least they know that the dividend payment will help lower the volatility and ensures that the company is now more shareholder-friendly.
On the date of publication, Mark R. Hake did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.