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Analog Devices Expects to Maintain Dividend Policy Following Planned Acquisition of Maxim

In July, Analog Devices announced plans to acquire semiconductor company Maxim for more than $20 billion.

Assuming the deal gains approval from regulators and shareholders, it is expected to close by the summer of 2021.

From a dividend safety perspective, Analog Devices plans to maintain its existing dividend policy and will continue targeting 7% to 15% annual dividend growth.

This guidance, coupled with our review of the combined company's financial health, leads us to reaffirm Analog Devices' Safe Dividend Safety Score. 

From a strategic perspective, Analog Devices and Maxim are complementary businesses.

Maxim designs and builds analog chips with a focus on serving the automotive and data center markets. Power management applications are a key focus area.
Source: Analog Devices Merger Presentation
Analog Devices serves the industrial, communications, and healthcare segments with a broad range of analog chips, sensors, and other signaling products.

The combined company will offer over 50,000 products serving more than 125,000 customers across hundreds of applications in a $60 billion addressable market.
Source: Analog Devices Merger Presentation
Teaming up will provide Analog Devices and Maxim with greater scale as the semiconductor industry continues consolidating.

With more comprehensive product portfolios and engineering capabilities, the new company can offer more integrated solutions and cross-sell its products across a larger customer base.

Unlike other some companies in the semiconductor industry, Analog Devices and Maxim focus on the slower moving but critical parts of the global economy such as the automotive and industrial end markets.

These industries have longer development cycles because the overall pace of technological advancement is relatively slower and the end products are expected to last for many years.

As a result, Analog Devices boasts an average product life in excess of 10 years, and the combined company is extremely profitable with a free cash flow margin north of 30%.
Source: Analog Devices Merger Presentation
From a dividend safety perspective, the combined company would have generated $2.7 billion of free cash flow over the last year. 

We estimate Analog Devices' annual dividend cost will increase from around $900 million to roughly $1.3 billion following the transaction. (Maxim shareholders will receive 0.63 of a share of Analog Devices' stock for each share of Maxim stock.)

As a result, we expect Analog Devices' free cash flow payout ratio to remain around 50%, a comfortable level given the steady cash flow analog chipmakers generate. For context, rival Texas Instruments has a payout ratio near 65%. 

The combined company's balance sheet further supports the dividend. Maxim has more cash than debt, and the transaction will be funded with stock (rather than debt).

Analog Devices' net leverage ratio is therefore projected to fall from 1.9x to 1.2x, and management remains committed to maintaining a strong investment grade credit rating. 

While execution risk is a concern with any large transaction (this is Analog Devices' biggest acquisition ever), both companies are seasoned acquirers. Most recently, Analog Devices bought Linear Technology in 2017 for $15 billion.

Overall, the combined company should remain in solid financial health while improving its position to capitalize on secular growth trends, such as the electrification of vehicles, 5G communications, cloud computing, and the Internet of Things.

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