Micron Technology Hikes Its Dividend 30% Due to Surging FCF - MU Is Worth 34% More - What's the Best Play?

Micron Technology Inc (MU) reported a massive increase in fiscal Q2 free cash flow (FCF). As a result, management raised the quarterly dividend per share (DPS) by 30% to 15 cents ($0.60 annual rate).
As a result, MU stock is worth 34% more at $567 per share. I will also explain why, and one play to take advantage of this: shorting out-of-the-money (OTM) puts for a 6% monthly yield.
MU closed at $422.90 on Friday, down from a pre-earnings release peak of $461.73 on March 18. But it could be worth considerably more, as this article will show.
Strong Free Cash Flow
Micron Technology is at the center of the massive increase in demand for its DRAM and NAND memory chips. These are for AI-related cloud and data center servers, as well as mobile phone and auto chips.
As a result, its fiscal Q2 revenue for the quarter ended Feb. 28 rose 111.6% over the prior quarter from $13.542 billion to $28.86 billion. For the six months of this FY ending Aug. 31, revenue was up 123% to $37.6 billion. Management guided that next quarter's revenue would be $33.5 billion (+/- $750 million), a 40% gain over fiscal Q2.
Micron also reported that its adjusted free cash flow (FCF) rose 76.6% Q/Q after capex spending was up 18.5% Q/Q. As a result, the adj. FCF margin rose from 28.6% to 28.9% of revenue:
This means that the company is squeezing out more cash from its operations as revenue rises. That's a sign of strong operating leverage and could imply its FCF margins will continue to rise.
That will eventually push MU stock higher, as will be seen below.
Higher Dividend Could Lead to Higher Price
Given management's confidence in its cash flow outlook, they raised the quarterly dividend per share (DPS) to 15 cents, up from 11.5 cents. That means the stock now has an annualized forward DPS of 60 cents and a forward dividend yield of just
$0.60/$422.90 = 0.0014188 = 0.1419% yield
That paltry dividend yield is still above its average yield last year. As a result, MU stock could have good upside. For example, both Yahoo! Finance and Morningstar report that the average yield last year was 0.11%:
$0.60 DPS / 0.0011 = $545.45 target price (TP)
In other words, if MU stock rises to an average yield of 0.11%, as it has done over the last 12 months, it will be worth +29% more at $545.45 per share.
Moreover, Micron Technology can easily afford this massive dividend hike, and possibly much more.
For example, given that there are now 1.1277 billion shares outstanding, its DPS payment will only cost $668 million:
1.12777 x 0.60 DPS = $667.6 million cost of dividend
Given that Micron generated over 10x that amount just in Q2 FCF ($6.899 billion), its payout ratio is just 2.4% of adj. FCF if it were to stay level:
$667.6m / ($6.899b x 4) = $668/$27,596m) = 0.024 = 2.4% payout ratio
But FCF is set to explode from here. And that could also push MU stock higher.
Higher Price Targets Based on FCF
Let's assume that Micron can generate an average 28.75% adj. FCF margin, as it did during the first half of FY 2026. Based on analysts' revenue estimates, here is where FCF could end up:
$108.77 billion rev. est. FY 2026 x 0.2875 = $31.27billion adj. FCF
$159.25 billion rev. est. FY 2027 x 0.2875 = $45.78 billion adj. FCF
In other words, adj. FCF could rise from $27.6 billion (on a run rate basis in Q2, i.e., $6.899b x 4) to an average of $38.5 billion over the next 12 months (NTM). That's a gain of $11 billion, or +40% from here.
That implies that MU stock could be worth considerably more.
For example, let's assume the stock market assigns a FCF yield metric of 5.8% to Micron's market value. That's equal to the LTM adj. FCF metric, given Micron's market value of $476.9 billion mkt cap today, according to Yahoo! Finance.
$38.5b NTM adj. FCF/ 0.058 = $663.8 billion
That's 39% over today's market cap of $476.9 billion. In other words, the price target is 39% higher:
$422.90 x 1.39 = $587.83 PT
Price Targets Summary
So, based on its dividend yield, MU is worth $545.45. And based on its FCF, it's worth $587.83. That gives it an average PT of $566.64, or 34% higher than today.
Moreover, other analysts agree MU is undervalued. For example, Yahoo! Finance's survey of 43 analysts shows a PT of $512.67, 21% higher.
Nevertheless, there is no guarantee MU will rise to these PTs. One way to make money in the meantime is to short out-of-the-money (OTM) puts.
Shorting OTM MU Puts
I discussed this play in a recent Barchart article (March 3, "Micron Technology Short-Put Plays Have Huge Yields - Attractive to Value Investors), which has worked out well. Those investors made a 5.8% yield in just 3 weeks for a 9% out-of-the-money (OTM) short-put play. It can now be repeated.
For example, put options at the $400 strike price for one month out (April 24), which is 5.4% below Friday's close, still have a huge premium: $23.80 per put at the midpoint.
That means a short-seller of these puts makes an immediate yield of almost 6% for the next month: $23.80/$400.00 = 0.0595 = 5.95% one-month yield!
That could be why there are now over 5,600 contracts outstanding at the strike price. However, based on its delta ratio of 35%, there is more than a one-third chance MU could fall to this strike price. That could be too high for some investors.
As a result, a safer, yet still high-yield bet is the $380 strike price: $17.03/$380 = 0.0448 = 4.48% yield for a 10% lower strike price. This strike has just a 27% implied chance of being assigned.
The point is that selling short out-of-the-money (OTM) MU put strike contracts is a good way to set a lower potential buy-in point.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com