The broader stock market has staged a partial recovery in the past few trading sessions after crashing hard in the wake of the novel coronavirus pandemic. But there is no guarantee that the recovery is going to continue as new economic data — such as unprecedented unemployment claims and a sharp drop in consumer confidence — continues to be released.
The upcoming earnings season is also going to be a tough one for corporate America. Analysts expect the S&P 500 index‘s earnings for the recently concluded first quarter to drop an average of 5.2%, followed by a double-digit decline in the second quarter. So, a weak earnings season could trigger the second part of the COVID-19-induced stock market crash.
This could be an opportunity for savvy investors to dig into dividend stocks that are trading at attractive levels right now and are generally considered better able to weather the downturn. Marvell Technology Group (NASDAQ: MRVL) is one such dividend stock that could help investors take advantage of secular tech trends and also provide an income stream.
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Marvell is beating the coronavirus effect
Marvell Technology surprised Wall Street with a solid quarterly report and guidance early last month. The company’s revenue guidance of $680 million turned out to be better than the consensus estimate of $672 million. In fact, Marvell expects its top line to increase 3% year over year in the current quarter even after accounting for a 5% impact related to the COVID-19 outbreak.
It isn’t to difficult to see why Marvell seems upbeat about its prospects despite the challenges posed by the novel coronavirus pandemic to global businesses. The company supplies computer chips that are used in the networking and storage markets, and the demand for them seems to be in good shape amid all the gloom.
For instance, Marvell’s 5G (fifth-generation) business was ramping up nicely before the coronavirus outbreak gained intensity. The company signed deals with Samsung and Nokia for its 5G offerings. Marvell could also take advantage of a ramp-up in Chinese 5G deployments thanks to its exposure to that market and its partnership with telecommunications giant Huawei, which recently won a nice chunk of 5G contracts in China.
On the other hand, demand for Marvell’s storage chips could also get a shot in the arm as more people work from home as a part of social distancing measures being deployed across the globe. Demand for laptops and networking equipment, for instance, has been increasing thanks to a jump in telecommuting and distance education, according to a report from Reuters.
Meanwhile, data center capacities also need to be upgraded thanks to a spike in network traffic as more people stay at home. As Marvell’s storage chips are used in solid-state drives (SSDs) and hard-disk drives (HDDs) that are deployed in PCs, servers, and the cloud, its business could sustain the momentum that it showed in the latest quarterly report.
What about the dividend?
Marvell Technology sports a dividend yield of 1.06%. That doesn’t seem much and is lower than the technology sector’s average yield of 1.57%. What’s more, Marvell hasn’t increased its payout since the dividend was first initiated in 2012.
The company has preferred using share repurchases to return cash to shareholders. Last year, Marvell paid out nearly $160 million in dividends, and its free cash flow of $273.6 million was enough to cover that payout. The company’s payout ratio of 36% further indicates that its current dividend level is sustainable.
Marvell hasn’t been able to raise its dividend over the years because of a choppy free cash flow profile thanks to an expensive lawsuit and a string of acquisitions. But the good part is that Marvell’s margins have started heading in the right direction of late.
As the company plans to return half of its free cash flow to shareholders in the long run, it could give its dividend a bump when things normalize. More specifically, an improvement in the bottom line should bolster Marvell’s free cash flow profile and pave the way for a higher dividend.
Moreover, Marvell’s resilience means that its dividend may not be vulnerable to the coronavirus-triggered economic crisis that has led a slew of companies to suspend or slash their payouts. Goldman Sachs predicts that dividends of S&P 500 companies could see a 25% decline this year.
If Marvell continues to defy the novel coronavirus-driven downturn thanks to strength in its networking and storage businesses, it should be able to avoid that predicament. Analyst estimates compiled by Yahoo! Finance indicate the same. Though Marvell’s earnings estimates have dropped over the past month, the company is still expected to clock strong bottom-line growth for the next couple of years.
In all, Marvell could be a stock worth considering for income investors despite a low payout, as it trades at just 9.6 times trailing earnings, which is significantly lower than its five-year average price-to-earnings (P/E) ratio of 48.
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