TSMC Cash Dividend Expected to Rise following Morgan Stanley’s Overweight Rating

21 Feb

Morgan Stanley upgraded Taiwan Semiconductor Manufacturing Co. (TSMC) from equal weight to overweight in a Feb. 18 report and moved the price target from NT$135 (US$4.06) to NT$168, on lower capital intensity and expected higher cash dividend.

Morgan Stanley believed that TSMC’s lower capital expenditure would not affect the company’s production. TSMC estimated its capital spending in 2016 to be around US$9 billion to US$10 billion, slightly lower than the market estimate of US$10 billion to US$12 billion. Compared to the 40 percent to 50 percent capital intensity in 2013 and 2014, the number is expected by Morgan Stanley to go down to 30 percent to 35 percent in 2016, projecting a possible higher cash dividend. TSMC issued a cash dividend of NT$4.5 per share in 2014, higher than the previous level of NT$3 per share.

Based on a dividend payout ratio of 55 percent, Morgan Stanley forecast the 2017 cash dividend to reach NT$7.5. The U.S. brokerage also said TSMC’s return on net operating assets could grow to a new high of 34 percent, from 29.3 percent in 2015.

Before Morgan Stanley released its report, TSMC on Feb. 17 upgraded its forecast of Q1 revenue by 1.5 percent to NT$201 billion to NT$203 billion. The profit margin for Q1 was estimated at between 44 percent and 46 percent, while the operating profit margin sat between 33.5 percent and 35.5 percent. TSMC revised its forecast based on order increase and favorable exchange rates, although some deliveries from two of its plants in southern Taiwan have been delayed to Q2 due to the 6.4-magnitude earthquake.

Lora Ho, TSMC senior vice president and CFO, said at the investors’ conference in Q2 2015 that the company’s capital intensity was to drop to around 35 percent, lower than that of the previous years. TSMC’s capital expenditure in 2015 was US$8 billion, while the production increased by 12 percent.

On Feb. 18, TSMC shares at one point reached NT$150.5, the highest level in nine months. Foreign investors also bought over 35,000 TSMC chares on Feb. 18. Before that, foreign investors had overbought TSMC for more than five straight days. TSMC’s ADR also rose 0.68 percent to US$23.8. On Feb. 19, TSMC shares closed at NT$151.0 on the Taiwan Stock Exchange.