Applied Materials Buys Back Investors

A new dividend may keep shareholders happy while the company hunts another acquisition.
By Chris Kraeuter ,

Applied Materials

(AMAT) - Get Report

shares received a 2.5% bump Wednesday after the company declared its first dividend and outlined a $4 billion share repurchase program. But have investors received their due?

Applied Materials' 3-cent-a-share quarterly dividend gives investors an annual yield of 0.7%, placing it below the average yield of 0.98% for dividend-paying corporations in the

Nasdaq 100

.

While its yield is now tied with chipmaker

Xilinx

(XLNX) - Get Report

, it trails its smaller competitor

KLA-Tencor

(KLAC) - Get Report

, which declared its

first dividend a month ago, and provides investors a yield of 1.7%.

The discrepancies certainly aren't because of a lack of cash: Applied's dividend will only cost it about $200 million a year, hardly a taxing proposition considering it has cash and equivalents of $6.6 billion and it generated $237 million in cash from its operations in the quarter ended Jan. 30.

However, free cash flow was negative in the quarter, thanks to a ramped-up share-repurchase program. The company spent $300 million to buy back its stock last quarter and has targeted buybacks worth between $300 million and $500 million in the current quarter.

To that end, Applied Materials erased a $3 billion repurchase program authorized a year ago, replacing it with a $4 billion program that's good for the next three years.

The buybacks make sense in terms of the company's stock movement. Shares are down 5.2% so far this year and are off 28% since the start of 2004. Although a pretty minuscule offering, the dividend comes in the context of the lack of growth in the semiconductor industry and the mounting pressure by shareholders to get rid of that mountain of cash.

Still, Applied Materials said at an analyst meeting late Wednesday that it doesn't expect dividends and repurchases to eat away significantly at current cash levels. "The outlook for the cash balance is that it should grow some over time," said CFO Nancy Handel.

That leaves investors with a more-than-sizable pile of cash that they can't get their hands on, suggesting Applied Materials will plunk some of that cash down on acquisitions to create shareholder value. Indeed, during Wednesday's analyst meeting, Handel referred to making mergers and acquisitions a "core competency" and said there are "synergies to be gained from acquired companies."

Whether Applied Materials springs for big-ticket deals remains to be seen, but already in 2005 a couple of nine-figure takeovers have sparked expectations of an imminent consolidation in the equipment industry.

August Technology

(AUGT)

is currently at the center of

a three-company bidding war between

Nanometrics

(NANO) - Get Report

,

Rudolph Technologies

(RTEC) - Get Report

and KLA-Tencor. KLA has the high bid so far at $205 million in cash, but August maintains it's sticking with Nanometrics, the company that started it all when it agreed to a merger of equals with August.

Then on Monday,

Entegris

(ENTG) - Get Report

and

Mykrolis

(MYK)

agreed to merge in a $582 million stock swap.

Mergers increasingly became a part of Applied Materials' strategy as 2004 progressed. It paid $85 million for

Metron Technology

to expand its services unit, it took over on-site servicing and spare parts management for

Brooks Automation

(BRKS) - Get Report

customers and then it did service deals with

Praxair

(PX)

and

Phoenix Silicon

. Applied also bought

ATMI's

(ATMI)

treatment systems business for $16 million, and it paid $7 million for

Torrex Equipment

.

Another acquisition by Applied may be just the ticket to extending Wednesday's dividend-induced good feelings.

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