Credit: Image source: .
Image source: .
Image source: NXP .
That's a great idea, right?
At the recent analyst day, NXP promised to start paying dividends by the end of 2017. It's just one of several cash deployment goals, leaving room for even more share buybacks and heavy investment in R&D projects.
There is nothing wrong with having a generous dividend policy -- except when there are better places to invest that cash. In my view, this is one of those mistakes.
Let's say that NXP delivers $4 billion of annual free cash flows by the end of 2017. It's an ambitious goal, but arguably possible. That steady trickle of share buybacks might have reduced the company's share count by 5% by then. Again, aggressive but doable. And management might follow the lead of other recent dividend newcomers in the tech sector, starting slow but eventually using something like 25% of free cash flows to power those brand new dividends.
All of these assumptions would work out to an annual dividend policy near $3 per share, or a 3.5% effective yield if you lock in shares at today's buy-in prices. That's right in line with Intel or Qualcomm, with some extra headroom for even further dividend growth. So far, so good.
But I think that's an unfortunate time to start sending out dividend checks. Remember the huge growth opportunities that lie ahead of NXP, mostly in the automotive market? That dividend budget could be used to boost NXP's research and development budget by roughly 50% overnight. And with these wide open growth markets ahead, that would be a far wiser use of additional cash.
I hope I'm overestimating the size of NXP's future dividend checks, and that the R&D boost will get a larger slice of the incoming cash pie. Otherwise, this seemingly shareholder-friendly cash return policy might hurt more than it helps in the long run.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
