Innovation and Shareholder Return - Analog Devices (ADI)

With a dividend yield of 2.3% and a price to earnings multiple of nearly 15 times historical earnings it is hard to get excited about Analog Devices Inc (ADI), unless you believe a genuine economic rebound is in the offing.

Judging from demand for their products, this could be a fair assumption.

ADI (ADI), which delivers high performance electronics goods, gives investors access to a technology play with more than 40 years of trading history. Its products are used in a variety of industries including digital cameras, LCD and plasma televisions, cellular handsets, medical imaging devices, and factory automation equipment.

When ADI's (ADI) business is booming one gets the sense that the global consumer are getting their feet back on the ground.

The fourth quarter culminated a very strong year for ADI (ADI) in which the company achieved record revenue, profitability, and cash flow. For fiscal year 2010, revenue increased 37% and earnings nearly tripled.

Operating income was $286m, or 37.1% of revenue, compared to $251m, or 34.9% of revenue while revenue increased 37% from the prior year to $2.8bn. Cash at the end of the fourth quarter came in at $2.7bn, up slightly from $2.5bn and the board of directors gave a thumbs up to an additional $1bn in share repurchases.

Commenting on the outlook for the first quarter, the company is pretty conservative. "Our book-to-bill ratio for the fourth quarter, as measured by end customer bookings, was below one as customers began to lower their inventories in response to shortened industry lead-times. During the fourth quarter, order patterns at ADI (ADI) weakened in late August and September, but substantially recovered in October. Overall, customer feedback indicates that end demand remains strong in most end markets. In this environment, we would expect to operate with less backlog and higher turns during the first quarter."

When assessing a technology company one needs to consider the trade-off between innovation (fad) and sustainability and perhaps a most apt quote can be taken from the ADI (ADI) annual report. "It is intuitive that innovation will separate the best technology companies from the mediocre ones, and that innovation is not a spigot that can be turned on and off in response to short-term order trends." Also prudently added is the line, “Innovation is Not Enough . . . Costs Also Matter".

In that regard ADI (ADI) has done well to not only manage its costs but ensure it has made consistent returns to shareholders.

Apart from being a steady if unspectacular dividend payer, since 1975 ADI (ADI) has had 16 stock splits. The dividend has also risen every year since 2003 and if you had invested $1,000 dollars on 30 October 1970, this would have grown to a comfortable $6.3m, including dividends.