Electrifying Dividends: Taiwan Semiconductor (TSM)

Dividend seeking investors sometimes need to look beyond the domestic stock market for higher-paying dividend stocks. One such case is New York Stock Exchange listed Taiwan Semiconductor (TSM) is currently yielding 4.67%.

Established in 1987, Taiwan Semiconductor (TSM) is the world's largest dedicated semiconductor foundry company. According to Wikipedia, a semiconductor is “a material that has an electrical conductivity between that of a conductor and an insulator. Devices made from semiconductor materials are the foundation of modern electronics, including radio, computers, telephones, and many other devices”.

Taiwan Semiconductor (TSM) is no small business. Its market capitalization is $50 billion (almost twice the size of rival Texas Instruments (TXN)) with 2009 revenues of $9.2 billion. Net income on that was $2.7 billion for a very healthy net margin of 29%. Both the net margin and operating margin exceed the industry standard by a huge margin. Cash flows from operations was about $5 billion easily covering dividends paid of $2.3 billion.

In terms of valuation the company is reasonably prices, with a price to earnings ratio of 13.5 times (one of the lowest in the industry), and a price to cash flow of 8.12. Return on Equity, Return on Assets and Return on Invested Capital all exceed 20%, which is remarkable for a company with such a large market capitalization. There’s also almost no debt on the balance sheet.

While the semiconductor industry is not very well understood, it’s important to keep in mind the critical equipment this company provides in our everyday lives. Semiconductors are technology enablers, widely regarded as a key driver for economic growth due to the scalability it provides the technology industry. According to research, from a worldwide base semiconductor market of $213 billion in 2004, the industry enables the generation of some $1,200 billion in electronic systems business and $5,000 billion in services, representing close to 10% of world GDP.

Over the past five years dividends have grown at just under 5% per year. In 2009 the company paid out 62% of earnings in the form of dividends. Despite the fact that the semiconductor industry is volatile and extremely cyclical, Taiwan Semiconductor has managed to keep net income around the $2.5 billion mark for the past five years.

The volatility of the semiconductor business puts a lot of investors off companies in the industry. However Taiwan Semiconductor (TSM) has historically experienced less volatility in its stock price than many peers. It’s also worth bearing in mind that the company presents tremendous barriers to entry and makes it very difficult for new competitors to emerge (Intel (INTC) operates in the same space, and look how many compete with that effective monopoly!). Some estimates put the cost of a new semiconductor plant at $1 billion, with others ranging from $2 billion to $4 billion. Such costs are necessary due to the large quantities of high precision equipment required, as well as technology for clean rooms and static free areas. Such costs are necessary as a speck of dust has the ability to destroy a microchip, which in fact uses pieces that are much smaller.

Taiwan Semiconductor (TSM) pays a healthy dividend, has tremendous barriers to entry and large cash flows. The only real question is whether or not the company can grow from this point, which it’s struggled to do over the last five years. Regardless there are dividends to be had but it may not prove to be the most prudent choice for the conservative income-seeking investor.

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