The stock price of Microchip (MCHP) dove over 10% this morning following yesterday's after-hours Q3 revenue warning by the company. I already owned Microchip, so of course I was disappointed. But my portfolio model allows me to buy more of this stock, which pays a substantial dividend. I consider it to be the safest stock in my portfolio because it pays a very substantial dividend for a technology stock. At a price of $32.77 the current yield is 3.6%, which is a bit less than you can get on a 90-day treasury bill right now.
If you read my analyst conference summary for Microchip's Q2, you will see that management's guidance for Q3 was "September quarter revenues expected flat to up 2%. GAAP EPS $0.36; non-GAAP EPS $0.39. " Q2 revenues were $264 million, up from $258 million in Q1.
The warning today stated Q3 revenues will come in around $258 to $259 million, or back to Q1 levels. GAAP EPS is estimated at $0.35 and non-GAAP (which excludes stock-based compensation) will be around $0.38.
So now Microchip is saying it will miss its earnings guidance by one penny per share. Hardly cause for an over 10% price drop on a stock with a high dividend yield.
On the other hand, I had predicted a good Q3 because I believe manufacturers who use Microchip's microcontrollers have been overly cautious about inventory levels and their own final demand. I still think that, because there are stories circulating of microcontroller-based devices like toys (these may be microcontrollers from other manufacturers) not being ready to meet holiday demands. It is lost money all around if stocks are insufficient to meet consumer demand.
Of course I like making more than 3.6% on my investments. Microchip has steadily increased its dividend over the years, so expect more in the future when the demand constraint disappears. I think the stock has considerable upside potential, dependent of course on revenue and net profit increases in future quarters. And compared to the much more risky biotechnology and technology stocks I tend to invest in, Microchip is a no-brainer for my portfolio.
You can see a list of stocks I like to follow at my analyst conferences list page. You can see more commentary at my Microchip (MCHP) page.
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