Will Micron Follow Nvidia and Give Investors a Huge Dividend Hike?

Once upon a time, semiconductor stocks were solid dividend payers.

Before the AI boom, many of these household names paid yields that were significantly higher than the S&P 500, a reflection of the earlier perception of chip stocks as cyclical companies that rewarded investors with dividends as much as growth.

Nvidia's (NASDAQ:NVDA) yield topped 2% shortly after it launched its dividend in 2012, and Broadcom's was hovering above 3% for much of this decade. Intel was a dividend powerhouse with a yield of 3%-4% for much of the 2010s, before axing the payout to invest in its turnaround.

As chip stock prices have soared, yields have fallen, and most of these companies have ignored their dividend, choosing to invest in growth instead.

Nvidia's dividend yield had shrunk to as little as $0.01 a share, or a yield of 0.02%, but the company recently rewarded investors with a 2,400% dividend hike, raising its dividend to $0.25 per share, or a yield of 0.5%.

That may not sound like much but for longtime shareholders and other investors with large Nvidia holdings, that represents a huge windfall. With a market cap of $5.3 trillion, Nvidia is handing out roughly $25 billion in annual dividend payments.

Given the soaring profits in the semiconductor sector, Nvidia is unlikely to be the last chip stock to make that move. Another obvious candidate appears to be Micron (NASDAQ:MU), which is one of the three big memory chip stocks, along with Samsung and SK Hynix.

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The case for a Micron dividend hike

Micron currently pays a quarterly dividend of $0.15, giving it a yield of just 0.06%.

Like Nvidia, Micron has seen profits skyrocket in the AI era, benefiting from the shortage in memory chips, and the stock is up more than 1,000% in the last two years.

The company initiated its dividend in 2021, shortly before a cyclical downturn in the memory sector that led to steep losses for the company. Today, however, Micron is far more profitable than it's ever been, with a net income of $50.5 billion over the last four quarters, and that's growing rapidly. That means Micron has a dividend payout ratio of just 1.1%, meaning it only returns one cent out of every dollar it earns in profits.

Micron could easily raise its dividend by 10x or 25x as Nvidia just did, and doing so could give the stock another leg up. Based on its price-to-earnings ratio, Micron stock is actually cheap, trading at a forward P/E of less than 7 based on fiscal 2027 expected earnings. That adds an incentive to hike the dividend as low valuations create opportunity for high yield.

Companies primarily spend profits on share buybacks, dividends, debt reduction, or some kind of business expansion like capital expenditures or acquisitions. Micron has big plans to expand, recently breaking ground on a $100 billion facility in upstate New York to be completed over the next 20-plus years, but the company can fund all of that with just a portion of next year's expected profits.

It's spent more than $9 billion to pay down debt this year, reducing its debt burden to just $5 billion, and it now has $25 billion in cash on its balance sheet.

The company has only spent modestly on share buybacks as well, despite the stock's ostensibly low valuation.

Will Micron hike its dividend?

Micron will eventually have to put the windfall from the memory bottleneck to use and share buybacks or dividend payments are the two most obvious choices.

Some combination of the two would make sense. Memory is notoriously cyclical and the company may be wary of overspending on returning capital to shareholders, but there's a way to do it prudently, as Nvidia has done. Doing so would take advantage of its valuation.

Micron could 10x both its dividend and share repurchases, and still have the vast majority of its cash flow available to invest in the business, or save for a rainy day.

Increasing the dividend and buybacks would reward investors and send a message that management still sees the stock as cheap, even after its parabolic rise. Such a move could give the stock a meaningful jolt, and that would be welcome news for investors as well.

Jeremy Bowman has positions in Broadcom, Micron Technology, and Nvidia. The Motley Fool has positions in and recommends Broadcom, Intel, Micron Technology, and Nvidia. The Motley Fool has a disclosure policy.