2015 wasn’t supposed to be a good year for Intel Corporation (INTC). You know the narrative: With the PC market shriveling, a chip-making dinosaur like INTC didn’t have a chance.
Intel — along with “Wintel” partner Microsoft (MSFT) — was destined to a slow, grinding death by a thousand cuts.
Well, it didn’t quite turn out that way. While Intel did indeed have a rough 2015 through August, the Intel stock price rocketed higher by more than 30% from late August to mid December. And Microsoft was one of the better-performing stocks in the S&P 500 in 2015.
Wintel is dead. Long live Wintel.
That’s the problem with an investment narrative. While it makes for a good story, it doesn’t always prove to be true. As often as not, it’s based on outdated information … and the news, good or bad, behind the narrative was long since baked into prices.
That’s where we are today with Intel stock.
The Real Story for Intel Stock
While the narrative for Intel was that of an old tech company facing obsolescence, the reality was a lot more complex. Yes, INTC’s revenues were flattish in 2015. But there was significant growth in its data center group (up 12% year-over-year in the third quarter) and its Internet of Things group (up 10% YOY in the third quarter).
Yes, the PC market is still suffering, and PC sales are expected to be down about 10% once the 2015 final numbers come out. But Intel, like Microsoft, is adapting its businesses beyond the PC and embracing the cloud. INTC’s bustling server business is essentially a play on mobile and the cloud, as both require powerful data centers powered by INTC’s chips.
All of that is fine and good, but after a 30% run, is there still any upside left in the Intel stock price?
Let’s take a look.
At current prices, Intel stock trades for just 15 times both trailing earnings and 2016 earnings (earnings per share are not expected to jump much in 2016). To put that in perspective, the S&P 500 trades for 23 times trailing earnings and 18 times expected 2016 earnings.
Sure, INTC isn’t growing as fast as it used to. Fair enough. But then, neither is most of the rest of the U.S. stock market or the U.S. economy either, for that matter. It’s hard to argue that Intel really deserves to trade at a 35% discount to the broader market.
Furthermore, INTC has been increasingly friendly to shareholders in recent years. In November, Intel announced it would be raising its dividend by 8% to $0.26 per quarter. That’s double the $0.13 per quarter Intel stock paid as recently as 2008.
Apart from a brief hiatus from 2012 to 2014, in which INTC opted to keep its dividend at current levels and divert cash to capital spending projects, Intel has been a very aggressive dividend raiser for a solid decade now. Over the past 10 years, it has grown the dividend at a 16% annual clip.
It might not be realistic to expect that kind of growth starting at today’s payout ratio of 40%. But I believe 7%-10% annual dividend growth is very likely for the foreseeable future.
Recognizing the cheapness of its shares, Intel has also gone on a buyback spree. Over the past 12 months, Intel has spent more cash than all but nine companies in the entire S&P 500 buying back shares. Management bought about $7 billion in Intel stock, reducing the share count by 2.6%.
Bottom Line for Intel Stock
Between the 2.7% dividend yield and the 2.6% buyback yield, Intel has returned nearly 6% to investors over the past year. That’s not too shabby.
So, what’s the call here? Is Intel stock a buy?
I would say so. I wouldn’t expect the stock to run up by another 30% in the next quarter, but I would expect it to outpace the broader S&P 500.
After a long stretch of underperformance, I expect to see value stocks outperforming growth stocks in 2016, and Intel stock should benefit from that trend.
Charles Lewis Sizemore, CFA, is the chief investment officer of investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. As of this writing, he was long INTC and MSFT.
