Is Analog Devices A Good Stock To Buy? It’s sometimes the case that the more obscure corners of an otherwise exciting industry are where traders can make the greatest returns on their chosen investments.
Take the microprocessor business. While Intel and Nvidia tend to grab the majority of the headlines, there’s an unfamiliar piece of the market that goes largely unnoticed.
Known as “analog semiconductors,” this underrated section of the fabrication field is as fascinating as it is profitable. The technology plays a critical role connecting the real world with the abstracted digital circuitry of our electronic devices, and is an indispensable component of the information age.
Indeed, one of the most important companies operating in the space today is Analog Devices, a Wilmington, Massachusetts-headquartered American multinational specializing in power management technology and data conversion. Although the enterprise might not be a household name like its rival, Texas Instruments, that doesn’t mean it doesn’t present just as compelling an investment opportunity as its larger competitor.
For instance, ADI’s share price has risen astronomically over the last decade. More recently, the firm witnessed its valuation grow more than 12% over the last twelve months, where Texas Instruments could only record a 5% loss during the equivalent period.
Interestingly, having acquired a stake in Analog Devices through its earlier ownership of Linear Technologies – which was bought out by the chip manufacturer in 2017 – Al Gore’s sustainable investment vehicle, Generation Investment Management, should be smiling at this recent development.
In fact, according to Generation’s 13F Form, the former vice president of the United States can lay claim to a massive $838 million position in ADI, representing 4.84% of the fund’s entire holdings.
However, despite the celebrity endorsement, the underlying reasons behind Analog’s excellent fortunes make for even more engrossing reading.
What Are Analog Semiconductors?
Analog integrated circuits are an amalgam of electronic parts that utilize electrical signals to interpret and measure physical quantities.
Indeed, they have a multitude of uses, including, but not limited to, automotive systems, communication systems, and industrial equipment.
Likewise, these devices are crucial to many applications since they are able to facilitate the processing of continuous signals. This function is different from digital semiconductors – which can only process discrete signals – meaning analog semiconductors are fundamental for processes that convert continuous signals into a digital form for further analysis.
Moreover, analog integrated circuits are a vital ingredient in modern technology for a number of other telling reasons, as they allow for the conversion of signals from one format to another. This is a basic competency in electronic gadgets that require communication – like radios, cell phones, and computers – since the absence of analog integrated circuits would render these devices unable to exchange information with each other.
In addition, analog semiconductors also find use in regulating the flow of electricity in electronic devices, in a process known as power management. This ensures a safe and efficient control of the energy flow, without which computers and other equipment might overheat and incur irreparable damage.
Significant Margins With Unrivaled Cash Flow
ADI’s penchant for recording consistently high profitability metrics is just remarkable.
For instance, at the end of fiscal 2021, Analog’s adjusted gross and operating margins were 71% and 42%, respectively, easily beating the S&P 500’s average of 46% and 22%.
Crucially, ADI can achieve these numbers because of its superior business operation and commitment to investment. The corporation has plowed roughly $10 billion into R&D over the last decade, with around 50% of its revenue derived from products that are ten or more years old.
And it doesn’t stop there. Analog Devices reckons it will benefit from a plethora of secular growth drivers in the coming years, such as the expansion of digital healthcare, augmented & virtual reality, next-gen connectivity, and Industry 4.0.
Analog Devices: One Of The Best Dividends On Offer
For a company with such magnificent cash-generating ability, it’s no surprise that ADI would also provide investors with a best-in-class dividend.
To begin with, Analog’s forward yield might appear fairly modest at 1.91%, but this is tempered by its pleasingly low payout ratio of 30.2%. This means the business isn’t needlessly overburdening itself with onerous dividend commitments, and the distribution should be safe going into the future.
Moreover, because of this margin of safety, ADI also has the room to regularly increase its dividend too. In fact, the enterprise has an unbroken 19-year streak of continuous dividend growth, with a 5-year compound annual dividend growth rate of 11.4%.
On top of that, the management has committed itself to return 100% of its free cash flow to shareholders, having already given back $1.6 billion in dividends and a further $3.1 billion in stock repurchases.
Is Analog Devices A Good Stock To Buy?
Yes, Analog Device is an excellent stock to buy. Its gross margin is 25% higher than the S&P 500 average, and its operating margin is 20% higher. It also has a 19-year streak of dividend payments, and 27 analysts have a consensus price target that is 12.1% higher at $217 per share.
Although ADI grew its total revenues by 21% to $3.25 billion in the first quarter of 2023, its price-to-sales ratio is still relatively high for the IT sector at 7.36. However, its forward GAAP PE multiple is in line with the broader industry at 25.5, while its price-to-earnings growth is admirably low at just 0.21.
That said, Analog Devices looks particularly tempting, especially given its high margins and EBITDA fraction, which is growing at a trailing twelve-month rate of 73.9%.
Ultimately, the company is a well-run business with plenty of potential in new and emerging markets. It creates value for investors in various ways and will continue to do so for quite a while yet.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.