Buy Analog Devices (NASDAQ:ADI) While It’s Still Cheap

Analog Devices Builds The Building Blocks Of Technology

Analog Devices (NASDAQ:ADI) is well-positioned to benefit from the rapidly accelerating trend of technological adoption. As a maker of integrated circuits, it is fundamental to the entire tech industry. That’s why it’s no surprise to see the company outperformed even its own upwardly revised estimates for the 2nd quarter. What is a surprise is that the stock moved lower over the past month.

I mean, it was just a month ago that Bank of America predicted another 20% to 30% upside for tech, and when it comes to tech, you just can’t do it without integrated circuits. Shares of ADI should be moving higher on that news alone. Add in the recent acquisition of Maxim Integrated Products (among others) and this stock should be trading well above its pre-COVID high.

Analog Devices Raises Guidance

You know a company’s business is doing well when management feels comfortable enough to raise guidance, so when Analog Devices did just that it was good news. Now, with the results coming in at the top-end of the range the bullish case for this stock has only solidified. To be fair, strength is centered in the Industrial and Communications segments of business but the outlook for both automotive and consumer electronics is positive.

Revenue for the quarter fell, that was expected, integrated circuits weren’t the first thing folks ran out to buy when the pandemic struck, but the decline was 20 basis points smaller than consensus. Add in the fact that revenue grew 11% from the previous quarter and it looks like the impacts caused by the pandemic are fading fast. At the segment level, Communications led with growth of 14% YOY followed by a 3% increase in Industrial. Automotive led in terms of declines, nearly -30%, while demand for Consumer products fell only -13%.

The company was able to deliver some strength on the bottom line as well. Gross margins contracted but an increase in Operating Margin more than offset the difference. The GAAP eps came in at $0.97, adjusted $1.36, and both beat consensus by more than a nickel. Looking forward, the company sees Q3 strength carrying over into the fourth quarter enough to offer guidance and in a range above the consensus. Revenue will be driven by Communications once again and that, primarily, due to 5G.

Analog Devices Dividend Is Worth Buying

Analog Devices isn’t as well-capitalized as some companies I’ve seen but this dividend is safe. In terms of cash, the company is sitting on just over $2.00 per share or about $800 million but that’s not much of a worry. The company has very little debt and a powerful stream of free-cash-flow that is only getting strong. In terms of cash flow, operating cash flow topped $2 billion in the trailing 12 months with nearly 90% of it unrestricted by debt or obligation.

The dividend yield is OK, a little over 2.0%, but it comes with a high-probability of future increases. The payout ratio is only 50% of earnings, there’s plenty of available cash-flow, and the history supports the idea. The company already has 16 consecutive increases under its belt and is well on its way to Dividend Aristocrat status. If the company follows through on its history the next increase will be next quarter and in the high-single-digit range.

The Technical Outlook: Analog Devices Looks Ready To Pop

Share’s of Analog Devices look ready to pop. The stock sold off last month, yes, but since then support has kicked in and the rebound is underway. Now, with prices consolidating above the short-term moving average the next target is the pre-pandemic high near $126. The $126 level is important for more than its role as resistance, it is also the all-time high. When that level gets surpassed and I think it will, the next target would be in the $140 to $150 range.