Taiwan Semiconductor Earnings: Wiser Capital Spending Paves the Way for Higher Dividends

Key Morningstar Metrics for Taiwan Semiconductor Manufacturing

• Fair Value Estimate: $139.00
• Morningstar Rating: 5 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of Taiwan Semiconductor Manufacturing’s Earnings

We’ve raised our fair value estimate for Taiwan Semiconductor Manufacturing TSM to TWD 900 per share (USD 139 per ADR at current exchange rates) after management gave upbeat fourth-quarter guidance fueled by stronger-than-expected smartphone sales, and we cut capital expenditure forecasts.

We now expect TSMC to stop increasing capital expenditure in 2024 to brace for a weak economy and focus on addressing bottlenecks for artificial intelligence applications that will bring the same revenue growth. By doing so, the firm has more room to increase dividends.

Better shareholder returns and an improving consumer electronics outlook should improve sentiment soon, and investors will be presented with a solid entry point while the stock remains very undervalued.

We reduce our capital expenditure estimates by 14% on average from 2024 onward. The short-term factor is ASML Holding’s ASML projection of flat 2024 revenue over 2023, along with orders for extreme ultraviolet lithography machines plummeting to EUR 500 million from about EUR 2 billion a few quarters ago. As TSMC is one of ASML’s top customers, this could mean TSMC is temporarily slowing cutting-edge capacity expansion to hedge against prolonged macroeconomic uncertainty.

The long-term factors are a shift away from capital spending on adding cutting-edge capacity toward addressing packaging bottlenecks to better meet AI demand, as well as building mature processes overseas. Lower capital expenditure should free up cash for dividends, so we modestly increase our dividend per share forecast to TWD 16 from TWD 15 by 2027.

TSMC anticipates fourth-quarter revenue to rise 12.4% sequentially to TWD 614.4 billion (USD 19.2 billion). That brings 2023 revenue down 5% from 2022—closer to April guidance of being down a mid-single-digit percentage than to the 10% decline guided in July. Unexpected strength in iPhone 15 sales is a major force behind the revenue outlook, as management remarked the 3nm process was ramping up faster than anticipated.