ASE Technology: Double Down On The Dividend On Any Pullback

Summary

Although the technicals (below) look poised to deliver a sell signal, ASE continues to deliver excellent numbers.

Management has just paid out an annual dividend of $0.30 to shareholders.

We look at the strength of the dividend and the potential for the pay-out to keep increasing at an elevated rate.

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MACRO PHOTO/iStock via Getty Images If we look at a long-term chart of Advanced Semiconductor (NYSE: ASX ), we can see that shares look poised to give a sell signal through the MACD indicator. This indicator is a solid read on both momentum and trend and is particularly noteworthy on long-term charts due to the amount of information being digested. As we can see below, shares have now dropped below their 10-month average and a move into negative territory regarding the histogram looks imminent. Furthermore, the fact that the pending crossover is currently well above the zero line also adds weight to the bearish argument. When we have setups such as this, we like to go to the dividend to see how strong and sustainable it is at present. The reason being is that many times long-term investors simply prefer to dollar-cost average their investments even in the face of sizable selling events. Suffice it to say, if ASX’s dividend metrics come back strong here, this would definitely provide some downside protection if indeed shares of ASX have topped. Therefore, from this standpoint, let’s delve into the key financial metrics which make up ASX’s dividend to see how strong the pay-out currently is.

First off from a dividend yield standpoint, ASX technology currently pays out $0.30 per share which translates to an annual dividend yield just under 4%. Straight off the bat, this looks attractive given that the sector median comes in at 1.27% and ASX’s 5-year dividend-yield average comes in at 2.62%. Many investors use the dividend yield as a barometer on the stock’s valuation so off to a good start here.

From a dividend growth standpoint, the annual pay-out increased from $0.136 per share last year to $0.301 per share this year. Growth is important because it usually comes off the back of rising earnings plus it also fosters confidence for future growth. Furthermore, strong dividend growth protects the investor’s purchasing power especially if interest rates were to rise somewhat from present levels.

As we can see from the recently announced third quarter numbers below, net income attributable to shareholders came in at almost 14.2 billion Taiwan Dollars. The strong bottom-line number which was a sizable sequential increase over Q2 was buoyed by strong growth within both the EMS & the ATM segments. Not only did sales increase but robust ATM demand powered gross margins forward in the quarter. All numbers below are in TWD. Source: Investor Presentation

Although the company did not generate free cash flow in the most recent third quarter, investors need to look at the whole picture here. Firstly, ASX’s dividend is an annual payout so one quarter is always going to come under more pressure from a cash flow perspective. Furthermore, management shelled out over 20 billion Taiwan dollars on capex in Q3 which was the highest quarterly investing spend for some time. Suffice it to say, if we go to the trailing annual figures, we see positive generated free cash flow on the back of 77 billion TWD of positive operating cash flow.

Furthermore, the sequential increase in the company’s net to debt equity ratio from 0.60 in Q2 to 0.71 also for the most part was due to the payment of that Q3 dividend. Although the 235+ billion TWD of interest-bearing loans amounted to 562 million TWD of interest expense in Q3, the interest coverage ratio surpassed 30 in Q3 and now comes in at almost 20 when averaged out over the past four quarters.

Suffice it to say, with only a twentieth of the company’s EBIT currently servicing interest-bearing debt, there is no reason why dividend growth cannot be sustained as long as momentum continues. Management actually gave guidance for the fourth quarter where it stated that margins in the ATM segment are on target to be in line with Q3 whereas the EMS segment might report a slight sequential drop. Even if margins though drop slightly on the EMS side, strong revenue growth (where over $6 billion is the top-line number expected) should ensure that we see a net […]

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