Published on July 7th, 2019 by Nate Parsh
Intel (INTC) is one of the largest technology companies in the world. The company is also a member of Dow Jones Industrial Average. You can see the entire list of Dow 30 stocks here.
While the company has a rather short dividend growth streak, the stock does offer a 2.6% yield at the moment. Intel stock has an attractive valuation as well, along with multiple catalysts for future growth.
The stock price has declined more than 7% over the last year. We believe that the decrease in value could offer investors an opportunity to initiate or add to their position in the stock.
Intel’s growth prospects, market share and free cash flow generation make the stock a good choice for investors looking for income from the technology sector.
Intel is the largest manufacturer of microprocessors for personal computers. The company ships nearly 85% of the world’s microprocessors every year. Intel also manufactures products used in cloud computing, such as servers and storage devices.
Intel trades with a market capitalization of $215 billion and generated nearly $72 billion in sales in 2018.
Intel’s business used to be primarily built around personal computers, but that business has experienced periods of weakness in recent years. In order to overcome this, Intel has moved more towards servicing customers in the cloud computing space.
And for good reason as this business has ample opportunities for growth in future years.
Source: Investor Meeting
As more and more companies require data centers and cloud storage, Intel is likely to capture more of this business. Intel also invests heavily in research and development. The company spent $13.5 billion, or 19% of total sales, on R&D in 2018.
Given the company’s size and scale, it will be difficult for competitors to match Intel’s dominance in its sector of the economy.
Recent Financial Results
On April 25th, 2019, Intel reported first quarter financial results.
Source: Earnings Presentation
The company’s earnings-per-share totaled $0.87 for the quarter. This was $0.06 above consensus estimates, but a decline of 6.5% from the previous year. Revenue was flat from the previous year at $16.1 billion, but a $30 million more than expected. Margins for the quarter were down 4% to 56.6%.
The company’s individual reporting segments showed a mixed quarter. The PC-centric business grew 4% during the quarter to $8.6 billion. Growth was due to a strong mix of high performance products. Gains were also made in the areas of gaming, large commercial and modem.
Intel’s Data-Centric business as a whole declined 5% to $7.4 billion. This follows several quarters of strong growth. Intel had expected at least the first and second quarter to show declines as this group was up against strong comparisons. For context, in the first quarter of 2018, Data-Centric sales increased 25%.
The most important part of this business is the Data Center Group, which produced $4.9 billion in revenue during the quarter. This was a decline of 6% from the previous year. The cloud segment improved 5%, but this growth was offset by a 4% drop in communications service provider revenue and a 21% decline in government revenue. Enterprise and communications sales were down due to excess inventory from previous quarters and weak demand from China.
Intel’s memory business was down 12% due to pricing pressures in certain areas, which were only partially offset by gains in data center and an increase in client base.
Revenues for Programmable Solutions Group were off 2% as weakness in cloud and enterprise more than offset strength in wireless and advanced node products.
There was some positive news out of the Data-Centric group. The Internet of Things Group grew 8%. Excluding Wind River, which was divested in the second quarter of 2018, this division actually improved 19%. This increase was primarily attributed to a shift in higher margin products, especially in the areas of artificial intelligence.
Mobileye, which is Intel’s smallest reportable segment, grew almost 40% due to high demand from customers and an expanded product lineup. Revenues reached a segment record $209 million.
Intel also provided updated guidance for 2019.
Source: Earnings Presentation
Intel sees revenue to decline 3.5% to $69 billion in 2019. The company now guides toward a midpoint for earnings-per-share of $4.35 for the year, down from $4.60 previously. The new guidance for earnings-per-share would result in a 5% decrease from 2018.
While the updated guidance is down on both the top and bottom line from what the company provided earlier, Intel expects business to pick up in the second half of the year.
While the market is often more concerned with a company’s performance in the short term, we feel it is important for investors to reflect on how a company did during the down portions of the economic cycle.
The figures below show how Intel performed before, during and after the last recession:
- 2007 adjusted earnings-per-share: $1.18
- 2008 adjusted earnings-per-share: $0.92
- 2009 adjusted earnings-per-share: $0.77
- 2010 adjusted earnings-per-share: $2.05
As with most companies during this time period, Intel’s business struggled during the last recession. The company’s earnings-per-share declined 35% from 2007 to 2009, though rebounded to make a new high in 2010.
While earnings results have been choppy since the last recession, Intel did not cut its dividend during the last recession.
Intel had increased its dividend for 10 consecutive years prior to freezing it in 2014. After recently increasing its dividend by 5%, the company has now raised its dividend for five consecutive years.
Even with the pause in growth, Intel has increased its dividend:
- By a CAGR of 4.8% over the past three years
- By a CAGR of 5.9% over the past five years
- By a CAGR of 7.9% over the past 10 years
The most recent increase is very much in line with the three-year average. Shares of Intel currently yield 2.6%, which is below the stock’s 10-year average yield of 3.2%.
On the other hand, the current yield looks very attractive compared to the average yield of 1.9% for the S&P 500.
Importantly for income investors, Intel’s dividend appears very safe. As stated above, Intel generated earnings-per-share of $0.87 in the first quarter.
For context, Intel currently paid a quarterly dividend of $0.315 per share, which implies a payout ratio of 36% in the most recent quarter.
Looking out over a longer time horizon, the payout ratio is lower. Intel produced earnings-per-share of $4.58 in 2018. The company distributed $1.20 of common share dividends during the same time period for a dividend payout ratio of 26% in the full fiscal year.
Intel is expected to pay out $1.26 in dividends-per-share this year. Using the company’s guidance for earnings-per-share of $4.35, this equates to a payout ratio of 29%.
The dividend appears safe on the basis of earnings-per-share, and from the perspective of free cash flow as well.
Intel generated $5 billion of cash flow from operating activities in the first quarter of 2019 and spent ~$3.3 billion on capital expenditures during the same time period for free cash flow of approximately $1.6 billion.
The company distributed $1.4 billion of common share dividends during the same time period for a free cash flow dividend payout ratio of 88%.
Looking out over a longer time horizon, the payout ratio is significantly lower. Intel generated $29.4 billion of cash flow from operating activities in 2018 and spent $15.2 billion on capital expenditures for free cash flow of $14.2 billion.
The company distributed $5.5 billion of common share dividends during the same time period for a free cash flow dividend payout ratio of 39%.
Using either earnings-per-share or longer term free cash flow, Intel’s dividend looks very safe.
Valuation & Expected Returns
Intel compounded earnings-per-share at a rate of nearly 20% from 2009 through 2018. Since 2010, the annual growth has slowed to 9.3%.
Due to expected continued weakness this year, we expect earnings-per-share to grow at a rate of 5% through 2024.
Based on guidance for the year, the stock has a price-to-earnings ratio of 11. Outside of 2009, when the multiple was artificially higher due to a steep drop in earnings, the price-to-earnings multiple has never averaged higher than 13.8 over the last decade.
We have a 2024 target price-to-earnings ratio of 13 for the stock. If Intel’s stock can trade with this multiple by 2024, then valuation will add 3.4% to annual returns over this period of time.
Therefore, total annual returns for Intel would consist of the following:
- 5% earnings-per-share growth
- 2.6% dividend yield
- 3.4% valuation multiple expansion
Added up, we forecast that shares of Intel can offer a total annual return of 11% through 2024.
Intel’s most recent quarter was disappointing. Revenue was flat while earnings-per-share declined from the previous year. The company also lowered guidance for the year.
Intel stock dropped more 9% the day of its earnings release. Since then, the stock is down another 8%. We feel that this selloff is overdone. The market appears to be concerned with short-term headwinds while not fully appreciating the longer-term picture.
Generally, stocks with the potential for at least 10% annual returns are given a buy recommendation from Sure Dividend. Intel meets this requirement.
As such, we encourage investors who were waiting for a pullback in the technology giant to consider purchasing shares of Intel at the current price.