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Does Applied Materials’ cash flow support its dividend policy?

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Jan. 14 2015, Published 9:14 a.m. ET

Dividend policy

Unlike other semiconductor companies—AMD (AMD) and Micron Technology (MU)—Applied Materials (AMAT) has been paying dividends since 2007. In December 2014, Applied Materials announced a quarterly cash dividend of $0.10 per share—payable on the company’s common share.

If Applied Materials posts good results, it will benefit ETFs—like the VanEck Vectors Semiconductor ETF (SMH) and the PowerShares QQQ Trust (QQQ). These ETFs have significant exposure to Applied Materials.

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Cash, debt, and cash flow position

As of October 30, 2014, Applied Materials had cash equivalents and short-term reserves of $3.17 billion. It had total debt of $1.95 billion. In 2014, Applied Materials generated $1.56 billion in free cash flows, or FCF.

Strong cash flow generation

As the above chart shows, the company generates strong cash flow. Strong cash flows indicate good earnings quality. Applied Materials’ cash flow from operations, or CFO, exceeded net income. It improved steadily over the quarters. Due to low debt, decent cash reserves, significant cash flow generation, and a relatively low payout ratio, it’s possible that the company will continue to pay dividends. Also, there’s a strong possibility that it will raise its dividend payment in the future.

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