by Marc Bastow | September 27, 2013 2:59 am
As if Intel’s (INTC) dismal stock performance wasn’t difficult enough for investors to stomach, now comes word that the dividend is staying pat once more.
Which means that, barring a surprise move before the end of the year, this will mark the second time since 2008 that Intel — which is wildly underperforming the market with 3% gains this year — has forgone an annual dividend increase.
That might not sound too disastrous, but for a company that’s essentially flat against its 2010 highs and has become mostly just a pure income play, it sure doesn’t feel right.
Still, INTC does throw off a nice chunk of income at nearly 4% annually. So, should you buy Intel stock with the thought that the status quo is good enough, and that you might get some marginal price appreciation, too? Or does INTC have to go?
To decide, we look at the pros and cons:
Cash Situation: Despite pressured and slowing earnings growth, Intel maintains a gleaming war chest of $17 billion in cash. Also, INTC generated $4.7 billion in operating cash flow in the second quarter, which can support the $1.1 billion it pays out in quarterly dividends many times over. Indeed, cash flow hasn’t gone below $4 billion in any one quarter for at least the past five straight periods, covering both the dividend and capital expenditures in every instance.
Scale: Intel is the world’s largest chipmaker, boasting a big, global footprint. It controls 80% of the desktop chip market and 87% of the laptop chip market — yes, those markets are slowing, but neither are in danger of extinction anytime soon. Even after announcing it will cut its 2013 capital spending program to $11 billion for the year, Intel still spends well in excess of any of its competitors, and can do so for the long-term in an attempt to keep up in mobile.
New Management: CEO Paul Otellini was an Intel lifer, having spent nearly 40 years at the company, including the past eight as the chief. He was successful, too, with revenues under his leadership higher than the combined 37 years before his tenure. However, INTC is now being led by Brian Kraznich — himself a virtual lifer, too — who acknowledged upon taking over that Intel was slow to the mobile world, and quickly launched an internal reorganization to respond to the challenge.
Mobile: Intel still remains far behind in mobile market share, boasting a meager 1% for tablets and a fractional share for smartphones. The company is showing some early promise, as in May, it unveiled Silvermont — a mobile processor that Intel believes can help it compete with Qualcomm (QCOM) and ARM Holdings (ARMH).
Slower Earnings Growth: The past three quarters have each been marked by decreases in earnings per share, and profits dropped nearly 30% in the most recent quarter. Intel has a “low single-digit” growth forecast for the next few years — and some slowdown should be expected as INTC works to transition itself towards the new mobile world with lesser reliance on the PC world. The question, of course, is how much slowdown should be tolerate, and for how long? We’ll get some indication when Intel releases Q3 earnings on Oct. 15.
High Payout Ratio: Intel pays out a relatively high 49% of earnings to dividends, well above technology peers like Microsoft (MSFT) at 34% and IBM (IBM) at 25%. Dividend Pros points out that CFO Stacy Smith is targeting a 40% free cash flow payout ratio; INTC clocked in at 57% last year. If management is serious about this, and cash flow doesn’t improve, that means future dividend increases are likely to be muted.
Intel at the very least has the technology and resources to stay alive and steadily pay its dividend for a long, long time, and if its developments pay off, growth could even be in the cards.
Still, INTC has a lot of catching up to do, plus a focus on reining in its payout ratio could hamper dividend growth — in fact, dividend pressure was the reason I bailed on my holdings earlier this year.
So should you buy Intel stock? No — investors don’t need to follow my example and sell, but I wouldn’t add to my existing position, either.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he was long MSFT.
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