The vast majority of Singapore’s blue chips cut their dividends last year.
As such, it’s unusual to find a stock that has increased its dividends for almost seven years in a row.
Micro-Mechanics (Holdings) Ltd (SGX: 5DD), or MMH, has managed this impressive feat.
The group designs, manufactures and markets high precision tools and parts that are used in the semiconductor industry for wafer fabrication and assembly.
With five manufacturing facilities located in Singapore, Malaysia, China, the US and the Philippines, MMH serves a wide variety of customers and can also produce proprietary consumable tools for clients.
MMH has ridden on a wave of digitalisation brought about by the pandemic that has led to a surge in demand for semiconductors and microchips.
Both revenue and net profit have also hit new record highs.
Given the backdrop, is it too late for investors to buy into its shares?
A dividend machine
The group has been a consistent payer of dividends since its IPO in June 2003.
For its debut year, MMH paid out a dividend of S$0.008.
Since then, the group has consistently paid out a dividend every year to reward shareholders.
Even during the depths of the Global Financial Crisis, MMH declared and paid out a total dividend of S$0.02 in 2009.
From 2010 till 2014, the annual dividend was kept constant at S$0.03 per share.
A significant boost came from 2015 onwards when MMH raised its dividend to S$0.05 per year.
And the rest, as they say, is history.
Apart from 2019, every year since 2015 has seen a year on year dividend increase.
For its latest fiscal year ended 30 June 2021 (FY2021), MMH again raised its annual dividend from S$0.12 to S$0.14.
Growing top and bottom lines
This increase in dividends was backed by higher profits.
Revenue and net profit had also climbed steadily since 2014, resulting in the ability to pay out higher levels of dividends as cash flow improved in tandem.
To provide an indication of this growth, revenue stood at S$43.9 million back in 2014 but has jumped to S$73.7 for FY2021.
Net profit has more than doubled from S$7.7 million to S$18.1 million, while free cash flow has more than tripled from S$5.6 million to S$18.9 million over the same period.
The group also chalked up an impressive return on equity of 31.2%, without taking on debt.
However, one aspect that investors should take note of, however, is that the group’s payout ratio has exceeded 100% in the last three fiscal years.
The ratio may imply that MMH is paying out more in dividends than it generates in net profit.
However, as the next section will point out, there are strong tailwinds for the business that ensure MMH can continue to grow its net profit.
Thus, the increase in dividends seems to signal confidence by management that net profit can continue to climb.
Tailwinds and structural growth
As mentioned earlier, the surge in demand for semiconductors has resulted in an upgrade in the global chip sales forecast.
The World Semiconductor Trade Statistics (WSTS) has upgraded its forecast for a third time this year, projecting sales of US$551 billion this year, up 25.1% year on year.
In addition, MMH also flagged that SEMI, a global association representing the electronics manufacturing and design supply chain, forecasts that global sales of semiconductor manufacturing equipment by original equipment manufacturers are poised to eclipse US$100 billion in 2022 after surging by 34% this year.
Over the longer term, VLSI research has also projected that global chip sales could double from US$450 billion in 2020 to nearly US$1 trillion by 2030.
For its part, MMH is confident that the semiconductor industry has shed its cyclical past and is now firmly on a path of structural growth.
The company’s confidence comes from the fact that chips have become increasingly embedded in almost every aspect of our lives, from smartphones and laptops to self-driving cars and robotics.
Get Smart: Compelling valuation
Based on the FY2021 earnings, MMH is trading at a price to earnings ratio of 24.6 times and a price to free cash flow of around 23.5 times.
Valuation is attractive considering the group has a consistent track record of growth and dividends.
Strong tailwinds in the next decade promise to bring the group to new levels of revenue and profitability.
Armed with a trailing dividend yield of 4.4%, adding MMH to your portfolio might just be a good idea.
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Disclaimer: Royston Yang owns shares of Micro-Mechanics (Holdings) Ltd.