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KLA-Tencor Corporation (KLAC - Analyst Report), the leading manufacturer of process control equipment, has announced its decision to hike quarterly dividend by 5 cents to 45 cents per share. This translates into a 12.5% increase from the prior dividend. The increased dividend is expected to take effect beginning with KLA-Tencor's quarterly dividend to be declared in August 2013. Prior to this announcement, KLA had been paying a quarterly dividend of 40 cents per share.

The strength of KLA’s business model is reflected in the company’s strong cash generation capabilities and its commitment to return value to shareholders. We believe that continued increase in dividends will inspire investor loyalty through higher returns from the stock.

KLA’s strong balance sheet and cash flows provide financial flexibility in matters of incremental dividend, share repurchases and strategic acquisitions. During the last concluded quarter, KLA spent $68.3 million on share repurchases and $66.6 million on dividends. The cash and short-term investments balance was $2.88 billion, up $301.3 million at quarter-end. The debt to total capital ratio including long-term liabilities and short-term debt was just 17.8%. We remain encouraged by KLA’s strong cash position and its ability to service its long-term debts.

KLA reported decent third quarter results, with both revenues and earnings per share surpassing our expectations. However, the company’s fourth quarter non-GAAP EPS guidance of $0.66-$0.86 was below the Zacks Consensus Estimate of $0.86.

Regular dividend hikes are a good way of encouraging investor confidence as it returns shareholder value. Though the company’s most important foundry segment remains under pressure, the underlying drivers (process node transition and strong demand for smartphones and mobile computing devices) should drive increased capex spending in the second half of the year.

Currently, KLAshares carry a Zacks Rank #3 (Hold). Other stocks that are performing well at current levels include Applied Materials Inc (AMAT - Analyst Report), FEI Company (FEIC - Snapshot Report) and Lam Research (LRCX - Snapshot Report), all carrying a Zacks Rank #2 (Buy).

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