Leave it to InvestorPlace‘s Jeff Reeves to beat me to the punch: While we’ve both been Intel (NASDAQ:INTC) enthusiasts — if not virtual apologists — our position is tenable no longer.
I’ve now spent enough time watching the stock languish (and in my case, taking losses), cashing dividend checks while hoping for any sign of a turnaround. But my problem reached “critical mass”; I don’t have enough in this to make it worth the long-term pain of the next, inevitable pullback, so I’m out — about a week after Reeves, who surprised me just this week with his withdrawal.
My main concern: I don’t think Intel will grow its business quickly enough to justify any significant run-up in its price, leaving me with a dead stock — and even Intel’s juicy dividend isn’t enough to make up for that fact.
Revenue and Earnings Growth
While it has the predominant position in the world of chips, Intel’s revenues over the last four years have been spotty. After two years of decent growth between 2009 to 2010 and 2010 to 2011, revenues slightly declined in 2012, and estimates for 2013 and 2014 revenues are already running behind original forecasts from last year. I don’t think sales will accelerate in any meaningful way any time soon.
Tom Taulli telegraphed Intel’s problems last September, and not much has changed: The PC-centric world continues to shrink, Intel still is behind in mobile chip technology — in fairness, so are AMD (NYSE:AMD) and Micron Technology (NASDAQ:MU) — and the companies that need chips aren’t waiting for Intel to forge ahead. Indeed, Microsoft (NASDAQ:MSFT) hedged its Intel bet by opting to use ARM (NASDAQ:ARMH) chips for its consumer version of its Surface RT line.
Also, margins are expected to come under pressure as mobile devices like tablets and readers have lower price points.
That in turn has put a cloud over the company’s earnings outlook: 2013 EPS are estimated to drop over 10% from 2012, and Intel’s estimated five-year growth of 11.75% is slower than the previous five-year period’s 12.63%.
It’s not a pretty picture, especially considering my five-year investment horizon.
The Dividend
This one’s a sticky wicket since I’ve advocated for the company mostly based on the dividend.
Intel currently yields an eye-opening 4.2%. Needless to say, that kind of dividend is really hard to part with. Worse, the company has a 10-year compound dividend growth rate of 12.5%, which, in theory, is enough to push it to a $2-per-share payout in seven years, which would translate into a scorching 9.3% yield. Even within my investment horizon — five years — we’d be looking at a 7% yield in my final year. It’s not crazy to think that’s possible, either, considering INTC’s massive cash hoard of more than $16 billion.
However, that $2 per share would be a ridiculous 93% payout ratio of its current earnings — and that’s not happening. No, Intel will have to significantly grow its earnings in the next seven years to justify that rate of increase, and as I said above, I just don’t think that will come to be.
In my case, I just don’t have that long to piddle around — even at that high level of income — if I don’t expect Intel to also throw me some capital gains … and it’s even harder after I’ve watched INTC sit essentially flat in the past three years while the Nasdaq has improved 40%.
So, I’m out of Intel, and looking for something more ideal and with far better growth prospects, even if I have to sacrifice a little income.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he had a sell order in for INTC.
