While a few big semiconductor names tend to garner all of the AI headlines, the growing AI buildout is benefiting the entire chip production ecosystem.

That includes semiconductor equipment stocks, tasked with making more volumes of increasingly complex chips. Amid high demand for more complex chips, revenue and profit are sure to flow to these companies.

That’s happening to one semi-cap equipment leader, which just announced a 15% increase to its quarterly payout.

Lam Research is gushing cash and poised for growth

Chip manufacturing giant Lam Research (NASDAQ: LRCX) is one of only a few major players in crucial etch and deposition steps of the chipmaking process. In particular, Lam specializes in equipment used to stack chip components in a vertical manner. That benefited the company when NAND flash went from planar structures to stacked 3D structures a decade ago. Fortunately for Lam, both high-bandwidth DRAM memory and advanced logic chips are now implementing more 3D structures. And even more fortunately, DRAM and advanced logic is where the bulk of AI-related growth is today.

On the recent conference call with analysts, management highlighted several new products which offer advanced etching capabilities for new complex vertical structures for AI. CEO Tim Archer noted: “Overall, etch and deposition are becoming increasingly critical to addressing the complex semiconductor requirements of a growing AI environment. We are excited by the breadth of opportunities we see ahead for the company, especially those created by technology inflections to gate-all-around, backside power delivery, advanced packaging, and dry EUV resist processing.”

AI-fueled growth is profitable for Lam, too

What’s especially positive about Lam’s growth is that it also comes with high margin and cash flow, which fuels the company’s growing dividend. Over the past 12 months, Lam achieved an impressive 30% operating margin and 45% return on equity. The margin is bolstered by Lam’s technological moat, and the fact that it has limited competition, mainly just from Applied Materials (NASDAQ: AMAT). Both Lam and Applied have similar metrics, showing rational pricing. Thus, it’s no surprise that Applied is also a terrific dividend growth stock.

Last Thursday, Aug. 29, Lam announced it would be raising its quarterly payout by 15%, from $2.00 to $2.30, good for a $9.20 annual dividend. That’s a yield of about 1.12% at the current stock price.

While a 1.12% yield may not seem like much today, the 15% increase is a promising sign. If a company has the capacity to raise its dividend above the rate of inflation for long periods, that stock could be a great long-term holding to provide hefty retirement income well into the future.

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Lam’s payout could grow double digits for years

Like Applied, Lam has a low payout ratio of just 27.6%, meaning it pays out just over a quarter of its net income as dividends. While not quite as low as Applied’s 15% payout ratio, it’s still a pretty low ratio, with ample room to increase. Moreover, Lam’s current dividend yield is higher than Applied’s at 0.83%.

Lam’s earnings may also be more cyclically depressed now. While Lam has displayed excellent long-term growth over time, it is just now poised to come out of recent cyclical dip. Meanwhile, Applied has had steadier earnings grower. The difference probably lies in Lam’s outsize exposure to NAND flash investment, which has been paltry in recent years following the pandemic.

But if Lam and Applied have similar long-term growth prospects, Lam’s earnings are more cyclically depressed and could bounce back harder. After all, the NAND recovery hasn’t happened yet, so as Lam experiences a NAND recovery combined with new AI growth opportunities in DRAM and advanced logic, its normalized earnings should go higher.

That means Lam’s higher payout ratio would be lower on more normalized, through-cycle earnings.

Share repurchases add fuel to the fire

Also like Applied, Lam is returning even more cash to shareholders beyond the dividend through share repurchases. Last quarter, Lam repurchased $373.5 million, greater than the $261.4 million paid out as dividends. And Lam has been even more aggressive with repurchases in the past when its share price was lower. For instance, it repurchased $980 million in stock in the June 2023 quarter.

That’s good capital allocation right there, and is how Lam managed to lower its share count by over 10% since late 2019, all while maintaining a cash-rich balance sheet of $5.85 billion in cash against just $4.98 billion in debt.

In sum, a company with growing earnings, a declining share count, and a low payout ratio is a terrific recipe for lots of dividend per share growth in future. Like peer Applied Materials, Lam is poised to deliver just that in the years ahead, especially with AI tailwinds at its back.

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Billy Duberstein and/or his clients have positions in Applied Materials and Lam Research. The Motley Fool has positions in and recommends Applied Materials and Lam Research. The Motley Fool has a disclosure policy.

This AI Stock Just Raised Its Dividend by 15%, and Even More Passive Income Should Be Coming was originally published by The Motley Fool