Monday, April 28, 2008

The Microchip Model

At the Xilinx analyst conference the other day [see my Xilinx analyst conference summary] one of the analysts asked if Xilinx would consider imitating "the Microchip model" and paying out higher dividends.

How the worm has turned.

Today Microchip reported on its Q1 2008 results and held its own conference [See my Microchip (MCHP) analyst conference summary]. The results were pretty good. Anyone who has followed Microchip this last year would have been worried that Q1 could be another quarter of declining revenues. Instead revenues were up sequentially 3% and up 1% from year earlier, to $260.4 million. Non-GAAP earnings per share hit a record.

The Microchip model (which in addition to knowing and having used their products attracted me to their stock) includes paying out dividends. For years Microchip management resisted doing share buy backs and instead kept increasing the dividend, at least in good times. And how Wall Street seemed to hate that. Every analyst conference included suggestions to take some (or most) of Microchip's cash and buy back stock.

What is great about Microchip, aside from their microcontroller products, is that management cares about long term investors. Such investors aren't going to sell their stock during a share buy back, nor do any short term gains from this game help them. Dividends mean revenue. You can do what you want with your dividends. Sure, you have to pay taxes on the dividends you receive, but you don't have to sell stock (and pay capital gains taxes) to get a stream of money. As far as I know, Microchip had (and has) the highest dividend payout in the semiconductor industry, where many companies pay little or no dividend.

This change of sentiment towards higher dividends may not last. Oddly, last fall the board of Microchip finally relented and set up a share buy back. They borrowed money to do it, too; I don't like that. But they are so profitable that are likely to be able to both continue to increase dividends and to pay down the debt (which is in the form of convertible debentures).

Best part of the conference? They raised the dividend yet again, to 33 cents per share per quarter.

In case it has not been perfectly clear, I own Microchip stock.

Keep diversified!

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