Is This Semiconductor Stock a Buy for Its 7% Yield?

Semiconductor stocks have staged a strong comeback in the last year, easily outpacing the broader markets as a group. Generally, these companies design and manufacture chips and related components used in computers, smartphones, and other devices. So, semiconductor companies are a key part of the tech manufacturing segment. 

A research report from McKinsey projects the semiconductor market will continue to grow through the end of this decade and potentially surpass $1 trillion by 2030 - making chip stocks a top investment choice right now. 

One large-cap semiconductor stock you can consider buying today is United Microelectronics (UMC), which has returned more than 320% in the last five years. However, the stock still trades 39% below its 2021 highs, allowing you to buy the dip. 

Additionally, the stock's pullback off those highs has increased UMC’s forward dividend yield to more than 7.3%, making the tech stock attractive to income-seeking investors. Let’s see why. 

United Microelectronics Stock: An Overview

A Taiwan-based company, United Microelectronics is engaged in the semiconductor foundry business. It manufactures metal-oxide semiconductor logic wafers, mixed-signal wafers, embedded memory products, and high-voltage integrated circuits, among others. 

Founded in 1980, UMC began as an integrated device manufacturer manufacturing first-party chips at its foundry. In the mid-1990s, it transitioned towards a contract manufacturing business model, spinning off its IC design division. 

Today, UMC is the second-largest contract chipmaker in Taiwan, and operates the third-largest foundry in the world. 

UMC Stock Partners with Intel

Compared to its much larger rival, Taiwan Semiconductor(TSM), UMC manufactures chips that are older and larger, but also cheaper. A few years ago, it stopped competing with chip makers, including TSM and Samsung, to manufacture smaller chips, which is a capital-intensive process. Instead, UMC shifted its focus to manufacturing chips for industries such as automotive and the Internet of Things (IoT). This approach allowed UMC to report consistent profits, as it increased adjusted earnings per share (EPS) by almost 80% annually between 2017 and 2022. 

UMC recently announced a partnership with tech giant Intel (INTC) to develop a 12-nanometer (nm) semiconductor process platform to address demand in markets such as mobile, networking, and communication infrastructure. 

The collaboration is likely to combine Intel’s at-scale manufacturing in the U.S. and UMC’s foundry experience to enable an expanded process portfolio. Additionally, it would offer global customers a wider choice in sourcing decisions, with access to a diversified and resilient supply chain. 

UMC Stock Pays a High Dividend Yield

UMC has paid investors an annual dividend each year since 2010. In 2023, UMC paid shareholders an annual dividend of $0.586 per share, up from $0.078 per share in 2010. So, in the last 13 years, UMC has increased its dividend by 16.5% annually, enhancing the effective yield in the process. 

In today's session, UMC is tracking the broader tech sector lower, after the company reported Q4 profit and revenue that beat consensus estimates - but also issued cautious guidance. Analysts tracking UMC stock expect its earnings to narrow to $0.70 per share in fiscal year 2024, compared to $1.16 in 2022. 

However, priced at 10.3 times forward earnings, the chip stock is not too expensive, given its tasty dividend yield of 7.35% - well above the tech sector median of 1.57%.

What's the Target Price for UMC Stock?

Out of the five analysts covering UMC stock, four have a “strong buy” recommendation, and one recommends “hold.” The average target price for UMC is $8.25, which is 6.8% above the current trading price. After accounting for its dividend, total returns could be closer to 14%.