Tuesday, September 14, 2010

Intel Dividend Stock Investment Thesis

Company Overview

Intel (NASDAQ: INTC) is the world’s leading manufacturer of semi-conductor technology.  The company was first incorporated in 1968 in California, USA.  They design and manufacture computing and communications components, such as microprocessors, chipsets, motherboards, and wireless and wired connectivity products, as well as platforms that incorporate these components.  They also produce flash memory, network processors, and software and healthcare products.

75% of yearly income comes from their PC client group, which is the intel chips inside your computer.  The other 25% is split among their other businesses.  Intel currently has about 80,000 worldwide employees, with 55% of those within the USA.  

Intel is not a processor manufacturer, Intel is the processor manufacturer.  As far as my (*average) knowledge of the world of computing, the only formidable challenger has been AMD.  But even they lag behind.  Almost every pc you find boasts of it’s intel processor.  Not to mention the increasing positions to be found in mobil computing in cell phones, notebooks, and tablets. 

Financial Analysis

Dividends

The company has paid a dividend every year since 1993, but has only increased their dividend consistently for the past 6 (the dividend was stuck at 0.08 a share from 2001-2003).  As such, it is neither a dividend achiever nor aristocrat, but hey, we all got start somewhere. 

The fact the company began paying a dividend shows that management believes the company is mature, has a strong moat against compeition, and has a stable enough cash flow year over year to continually increase it’s payout to shareholders. 

At the current price of 17.97 it yields 3.12%

10 year                                                           
25.70%
5 year1
15.02%
1 year
1.82%

           
Growth has slowed considerably in the past year.  This has been pretty common among dividend paying    companies (except for superstars like Coca Cola and JNJ)

Payout ratio has averaged 33% since 2000, but crept up to 60% then 73% in the past 2 years.

Cash Payout Ratio averaged 28% since 2000, and was 48% in 2009.

In conclusion at the current price the yield is above my 3% entry criteria.  Growth has slowed considerably, but that is not uncommon right now.  Cash flow has always been sufficient to cover. 

Income Statement

Revenue has been pretty dead for the past decade. 

10 year
0.45%


5 year
-2.47%


1 year
-6.54%

EPS has also seen declining numbers

Intel has bought back shares at about 5% annually, though this has also slowed in past year.

Earnings have been sluggish in the past decade.  However, Intel has averaged a gross profit margin of 55% since 2000.

Balance Sheet

The balance sheet is very clean, and intel carries very little debt. 

Current Ratio has stayed above 2 since 2000

Total Debt to Capital Employed is 5%

Total Debt to Equity is also 5%

Cash Return on Total Capital has averaged 16% in the past 10 years

Cash Flow

Free cash flow has been positive for the past 10 ears.

Cash flow per Diluted Share Growth

10 year
3.26%
5 year
-5.10%
1 year
18.28%

Cash Payout Ratio has averaged 28% for 10 years, and was 48% in 2009

Stock Price

Current Price
17.97
P/E
23.34
Est Forward P/E
9.56
Div Yield
3.12%
Int. Value
19.93
Next Year Int. Value
21.35



The intrinsic value is based off the 10 year treasury rate, as well as the dividend income from 1 share.

AT 17.97 the stock is trading above it’s 5 year average high yield of 2.8%, and below it’s 10 year average low p/e of 26 

Conclusion

I am not quite ready to buy into Intel yet.  I think their business has a good future, and they have a very strong brand and competitive moat.  Their worldwide operations insure they will have opportunity in the explosive growth emerging markets will provide. 

Their income statement has not been great, but it has been a very tough decade.  They carry very low levels of debt, so they can weather depressed economic conditions. 

Cash flow is strong and has stayed both positive and enough to cover increasing dividend payments. 

My few reservations are
            1.  6 years of dividend increases is not very impressive, considering some other company records out there.  I would like to make sure Intel management is really focused on providing increasing dividends to shareholders before I dive in. 
            2.  The p/e is out of my buy range.
            3.  The intrinsic value is not as high as I would like it to be, especially without the confidence of 25+ years of dividend increases to show increasing dividends is a priority.
            4.  Even Intel admits that they must constantly innovate.  They say many of their products have life-spans of 1 year or less.  Now whether this is good or bad is debatable.  Bad:  they must spend large amounts of money on R&D to stay ahead Good: It would be hard for another company to innovate so quickly, and manufacture new products on such a scale as to enter the marketplace as a major player. 

I will not buy in just yet, but I will watch this stock.  If the company stays in low debt, with strong cash flow, and continues increasing dividends at a good rate, I will initiate a position.  

1 comment:

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