NXP Semiconductors: Increasing Capital Returns to Shareholders

NXP Semiconductors (NXPI) provides various semiconductor products, including microcontrollers, application processors, communication processors, wireless connectivity solutions, analog and interface devices, Radio Frequency power amplifiers, and security controllers, as well as semiconductor-based environmental and inertial sensors.

Its product solutions are used in a range of applications, including automotive, identification, mobile, consumer, computing, wireless infrastructure, lighting and industrial, and software solutions for mobile phones. NXP Semiconductors was incorporated in 2006 and is headquartered in Eindhoven, the Netherlands.

I am neutral on NXPI stock. The company reported very strong 2021 results, but the overall financial strength is moderate due to the high level of debt, and its valuation is rich.

NXP Semiconductors Q4 2021 and Full-Year 2021 Financial Results

Semiconductor stocks like NXPI face a global shortage in chips and very strong demand, which challenges their business operations. NXP Semiconductors delivered solid fourth-quarter results and provided investors with an upbeat outlook, which is both positive and supportive of the stock price.

NXPI stock earnings have been increasing as of Q2 2020. In Q4 2021, GAAP EPS of $2.24 was a beat by $0.15, and revenue of $3.04 billion was a beat by $36 million.

Τhe key highlights for Q4 2021 were an increase of 21.2% in revenue year-on-year, GAAP gross margin of 56.2%, and GAAP operating margin of 26.6%, and operating income of $807 million representing an increase of 74.3% compared to operating income of $463 million in Q4 2020.

Net income of $602 million increased 94.8% year-over-year compared to net income of $309 million in Q4 2020, and diluted EPS rose to $2.24 versus $1.08 in Q4 2020, an increase of 107%.

For the full-year 2021, NXP Semiconductors reported record revenue of $11.06 billion, an increase of 28% year-on-year, GAAP gross profit of $6.06 billion, an increase of 43% year-on-year, and GAAP operating income of $2.58 billion, showing an increase of 518% year-over-year.

Also, net income came in at $1.87 billion, representing a surge of 3,498% year-over-year compared to net income of $52 million in 2020, and diluted EPS was $6.79, increasing 3,606% compared to diluted EPS of $0.18 for 2020.

NXP Semiconductors announced very positive news for the shareholders by approving a 50% increase in the quarterly cash dividend to $0.845 per ordinary share and by approving a new $2 billion 2022 share repurchase program in addition to the approximately $1.35 billion programs remaining for repurchase under previously authorized share repurchase programs.

For the full year of 2021, all business segments showed an increase in revenue. The Automotive segment showed the largest increase of 44%, and the Communication Infrastructure & Other showed the smallest increase of 3%.

It is important to mention that for the full 2021 year, the company returned $4.58 billion to shareholders through previously announced share repurchases and cash dividends.

NXP Semiconductors Fundamentals

NXPI’s debt-to-equity ratio of 1.6 is considered high. The profitability is very strong and rebounded sharply in 2021. NXP Semiconductors has shown predictable revenue and earnings growth, and its dividend yield is close to a one-year high. However, the dividend track record is unstable.

Valuation

NXPI is relatively expensive based on its P/E ratio of 26.8x compared to the U.S. semiconductor industry average of 23.8x and based on its PEG ratio of 1.4x. It is also relatively overvalued based on its price/book ratio of 7.6x compared to the industry average of 4.2x.

Wall Street’s Take

NXP Semiconductors has a Moderate Buy consensus based on 10 Buys, seven Holds, and one Sell rating assigned in the past three months. The average NXP Semiconductors price target of $245.00 represents 34.9% upside potential.

Conclusion

2021 was very strong for NXPI stock. Management has expressed that its focus is to invest in solutions that will drive profitable growth in the long term and robust capital returns to shareholders.

The dividend hike is attractive, but the valuation is rich. After a surge in profitability in 2021, the firm should deliver sustainable profits and face the chip shortage problem effectively.

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