NXP Semiconductors (NXP, Financial), one of the world’s largest semiconductor companies, has lost 42% of its stock price this year. With significant stock price decline, NXP has far underperformed the largest semiconductor index (SOXX) by 27% more. The company’s fumbled merger with Qualcomm (QCOM) has made a contribution to its price decline. In hindsight, NXP’s record buybacks were poorly timed.
According to Reuters, the Netherlands-based NXP became the world’s biggest maker of automotive electronics after it bought U.S.-based Freescale Semiconductor for about $12 billion last December.
A decade since being incorporated, NXP’s already impressive expertise in several industries including but not limited to automotive, personal security and identification, and wireless and wireline infrastructure has prompted a takeover bid from Qualcomm back in October 2016.
China, meanwhile, dragged its feet amid ongoing geopolitical tensions, thus leading to Qualcomm abandoning its bid altogether in July of this year. NXP’s stock price dipped 8% upon Qualcomm’s deal termination announcement and has never recovered since.
As per its recent quarter, NXP met Wall Street earnings expectations. The company reported 2% revenue increase and 1,256% rise in profits. Minus the $2 billion termination fee that Qualcomm needed to hand to NXP because of a failed merger, NXP would still have delivered a healthy 5.7% profit increase.
NXP, nonetheless, is projecting a 3% revenue decline on average in its fourth quarter operations compared to last year.
The company’s decision to return $5 billion, mostly through buybacks, since the failed Qualcomm deal indicated nothing short of NXP’s strong shareholder stewardship.
Although nobody could have foreseen the recent market rout, NXP spent $5 billion in buying back its shares at an average price of $93.47 compared to today’s share price of $71.50.
Using the cash it received from Qualcomm, company cash, and debt, the buyback activity has increased NXP’s leverage to still an acceptable level of 0.59x debt to equity in the recent quarter compared to 0.5x a year ago.
Further, NXP’s recent initiation of quarterly dividends adds to the company’s credibility that it can sustain business operations while providing steady payouts to its shareholders moving forward.
The company intends to pay out 20-25% of its cash flow from operations to its shareholders.
Meanwhile, Wall Street is slowly placing more buy recommendations on NXP’s stock compared to the last quarter with an average "overweight" recommendation and a price target of $101.86 per share.
Investors who prefer buybacks over dividends may have to wait for a while to see this sort of massive buyback activity again as the company has been able to generate, on average, $1.55 billion of free cash flow in recent years.
Disclosure: No shares in NXP.
