Capital Return Program Wins United Microelectronics An Upgrade From Bernstein

Taiwanese semiconductor foundry United Microelectronics Corp (ADR) UMC has won Bernstein's approval due to its capital return program.

The company's foundry business makes integrated circuit wafers for fabless semiconductor companies.

The Analyst

Analyst Mark Li upgraded shares of UMC from Underperform to Market Perform and increased the price target from $2.10 to $2.60.

The Thesis

UMC's board recommended a dividend of 0.7 Taiwanese dollars as against expectations of 0.55 Taiwanese dollars, also higher than the historical level in terms of dollar amount and the payout ratio, Li said in a Monday note. 

The company announced plans to buy back 200 million shares and distributed 3.1 billion Taiwanese dollars to investors, the analyst said.

The March 8 announcement sent shares higher by 10 percent on the day, Li said. 

The analyst said he expects a dividend payment of 0.7 Taiwanese dollars per share in 2019 and 2020, representing a payout ratio of 100 percent and 90 percent, respectively.

To fund the capital return, Li said United Microelectronics is planning to trim capex more than expected. 

In a bid to improve its corporate governance, Li said the company is planning to increase its number of external board members from five to six, with four being independent directors. Bernstein views this as a positive for the company's future corporate governance.

Despite higher government subsidies and grants, Li said he expects United Microelectronics to post below-consensus earnings per share for 2018, but said its cash position will improve going forward, providing more leeway for the company to reutrn cash to investors. 

"Our analysis finds UMC can sustain the dividend payment long enough, albeit its lower investment level and its lower valuation also has reflected the risk of strategic changes and execution challenges," Li said. 

The Price Action

UMC shares have gained about 16 percent year-to-date.

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Photo courtesy of United Microelectronics.