Technology

Why Merrill Lynch Says Income Fund Managers Should Buy Semiconductor Stocks

We have seen dividend yields skyrocket across all sectors as falling stock prices have pushed them higher. With bond yields tumbling to generational lows as investors looking for safety pile in, portfolio managers at income funds are finding themselves in a quandary looking for suitable investments. The problem portfolio managers have is that, in many sectors, dividends are being cut or eliminated altogether, and adding them to a portfolio looking to produce consistent income becomes a risky proposition.

In a new research report from Merrill Lynch, the firm’s semiconductor analyst Vivek Arya makes the case that income fund managers should probably be looking at the semiconductors for solid yield potential, and with good reason. Arya points out that the stocks are very underweighted, have resilient computing end-markets, trade at low 12 or 13 price-to-earnings ratios and, with other sectors facing severe cuts and reductions, the consistent and reliable dividends paid by the chip companies make sense in our brave new world.

We found four stocks that are rated Buy at Merrill and come with big dividends that make sense for portfolio managers and more aggressive retail investors.

Broadcom

This company has rallied smartly off the lows but still offers big upside potential. Broadcom Inc. (NASDAQ: AVGO) has an extensive semiconductor product portfolio that addresses applications within the wired infrastructure, wireless communications, enterprise storage and industrial end markets.

Applications for Broadcom’s products in its end markets include data center networking, home connectivity, broadband access, telecommunications equipment, smartphones and base stations, data center servers and storage, factory automation, power generation and alternative energy systems and displays.

Top Wall Street analysts like Broadcom’s leadership in the mobile, data center and broadband markets, and especially in the radio frequency (RF) arena. Many on Wall Street see a cyclical rebound in industrial and communications demand on the horizon.

Investors receive a very large 5.03% dividend. The Merrill price target for the shares is $305, and the Wall Street consensus target is lower at $296.04. Broadcom stock closed trading on Monday at $258.28 apiece.

Intel

This legacy leader in semiconductors has continued working hard to focus more on Internet of Things and data center cloud spending, and it was one of the top picks at Merrill Lynch for 2020. Intel Corp. (NASDAQ: INTC) designs, manufactures and sells integrated digital technology platforms worldwide.

The company’s platforms are used in various computing applications, comprising notebooks, two-in-one systems, desktops, servers, tablets, smartphones, wireless and wired connectivity products, wearables, retail devices and manufacturing devices, as well as for retail, transportation, industrial, buildings, home use and other market segments.

The analysts said this in front of the earnings for the first quarter, which will be reported this week:

We see inline first quarter, with our second quarter fiscal year 2020 estimated sales 3-4% below Street estimates. Focus on 10 nanometer manufacturing progress & on original $5 fiscal year 2020 earnings guidance (we/street now lower at $4.57/$4.82) We like Intel’s underappreciated scale/incumbency in secular AI/5G/cloud markets; the dividend yield also attractive/defensible.

Investors receive a 2.19% dividend. The Merrill analysts have set a price target of $68. The posted consensus price objective is $63.10, and the last Intel stock trade on Monday came in at $59.18.