Intel (NASDAQ:INTC) has underperformed the S&P 500 so far in 2013, with a modest 4% gain since Jan. 1. However, with a high dividend yield of over 4% and longtime dominance in the tech sector, I remain convinced that Intel is a great low-risk, long-term investment.
The risk factors are pretty obvious, of course. There’s a serious risk to Intel’s business as the “post-PC age” weighs on computer sales and more mobile devices catch on. These include tablets like the Apple (NASDAQ:AAPL) iPad or Amazon (NASDAQ:AMZN) Kindle, mobile phones like the new BlackBerry (NASDAQ:BBRY) Z10, the Google (NASDAQ:GOOG) Nexus line and everything in between.
Consider tablet sales will surpass PC sales this year, according to some industry estimates. With the lack of a truly popular (and profitable) mobile line, Intel remains behind the curve as companies like ARM Holdings (NASDAQ:ARMH) dominate the mobile market.
But I have faith Intel will catch up on mobile chip design. And in the meantime, Intel has a lot of things going for it that will provide at the very least stability — and theoretically, a platform to incremental growth.
The most interesting part of Intel’s Q4 earnings was the $13 billion it announced it would be setting aside for capital expenditures. That’s $2 billion higher than 2012 capex, and a sign that Intel is planning on investing in itself big-time in 2013.
Some are concerned the move will only hurt Intel stock — after all, its margins dipped to 62.1% from 62.5% last quarter thanks to “aggressive tactical actions” to reduce inventory levels. Why increase production and suffer another glut? But after dominating the semiconductor market for so many years, I have faith that Intel knows this business and wouldn’t boost production so soon after oversupply issues unless it had a very good reason. Maybe that’s blind faith, but I’m giving a $100 billion company some credit here.
Also, we sometimes forget that while PC sales aren’t brisk, they aren’t crashing. Many businesses still are buying computers for employees. And furthermore, many servers run Intel Xeon chips, so there is a business beyond desktops and laptops to look at. If anything, the cloud revolution and data-hungry gadgets have made server space even more in demand than ever, and that’s a growth opportunity.
Put in hard numbers: Gartner recently estimated a 7.9% growth in device spending across 2013 and 3.7% in data systems. Not all of that money will necessarily go to Intel, but it’s important to remember that the mobile revolution has not wholly replaced laptops and desktops. Visit any office, and you’ll find there are still plenty of “old school” computers that are still crucial to the American work force, and those are devices Intel is making money on.
Intel is the top chipmaker in the world, bigger than No. 2 Samsung (PINK:SSNLF) and No. 3 Texas Instruments (NASDAQ:TXN) combined. That scale counts for something, and any modest uptick in the overall market is sure to matter at a dominant player like Intel.
There’s admittedly risk that Intel has overplayed its hand and that PC and laptop sales are caught in a death spiral. But I don’t buy it.
I type faster on a tactile keyboard, IT managers use high-powered PCs, and many graphic artists and programmers need a computer with professional software instead of apps. There remains a robust need for computers in businesses, even if it is easier to surf the web and watch videos on a tablet.
The fair valuation, strong balance sheet and big dividend also provide some amount of security despite uncertainty. Although Intel has low single-digit growth forecasts for the next two years, it sells for roughly 10 times FY2014 earnings. The operating cash flow was more than $18 billion last year. And the 4.2% dividend is not just double the S&P average, but also a sustainable 44% of FY2014 profits.
It also is worth noting that a new CEO will be named soon to take over for Paul Otellini after eight years. An ambitious hire coupled with a revamped mobile strategy could really pay off for the stock in the long run.
But that kind of speculation isn’t the reason to buy Intel. I remain convinced it is at worst fairly valued, with a big dividend and stable share price. You could do worse right now considering all the uncertainty in the market — particularly the frothy tech sector.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.