Intel (NASDAQ:INTC) is likely to rise significantly from two shareholder-friendly moves: an expected dividend hike in Q1 2020 and the company’s new $20 billion share repurchase program. This after Intel stock survived a pretty choppy 2019 to come out looking good.
Typically Intel increases its dividend per share no longer than after four quarters. It has been four quarters since the last dividend increase. So there is every reason to expect one by no later than the announcement of Q4 earnings, sometime in early Q1 2020.
In the last five years, Intel grew its dividend per share by an average of 5.92%. Its quarterly dividend of 31.5 cents per share is up 5% from the last hike on Feb. 5. As mentioned, there have now been four quarterly dividends of 31.5 cents per share.
Intel generates plenty of cash to pay its dividends. In fact, free cash flow is expected to be $16 billion this year, according to Intel’s latest guidance. In the nine months to September 30, Intel paid out $4.214 billion in dividends. So at the same rate, dividends are likely to be $5.596 billion this year, well below FCF of $16 billion.
But since Intel has been buying back stock very aggressively, it is likely the dividend hike this time will be higher.
Buybacks and the Dividend Hike
In the last four quarters, Intel has bought back so many of its own shares that its share count is down 4.69% or 214 million shares for $10.1 billion. So think about it. That means that if Intel decides to pay out 5% more in dividends, its dividend per share hike would be greater than 5%.
Intel will likely spend $1.382 billion in dividends in Q4. If the next dividend payment is 5% higher the dividend payment will be $1.4511 billion. But the number of shares outstanding is now 5% lower at 4.35 billion. Therefore the new dividend per share will be 33.39 cents per share. This is 5.9% higher than before, not 5%.
In other words, the dividend per share hike benefits from the dividend payment increase by a greater amount on a percent basis. You can imagine, over time, this could compound into a significant gain.
Intel Stock and the New Buyback Program
On Oct. 24 Intel announced a whopping increase in its buyback program. First of all, it made clear that in the third quarter, it had bought back $4.5 billion in shares. This is 45% of the $10.1 billion it spent during the whole past three quarters. In other words – a major increase.
Then Intel also said its board of directors had authorized another $20 billion in share repurchases. At today’s price that would amount to almost 10% of its $243 billion market value (i.e., including its buybacks this quarter).
If Intel repurchases 10% of its stock, plus the 5.9% increase in dividend per share (with a 5% hike in dividend payments), Intel stock is likely to rise. By my math, that means the Intel stock is due for a 16% increase. It could go higher if the buybacks are done aggressively and the dividend payment increase is greater than 5%.
What Should Investors Do?
With this information, we can estimate that Intel is likely worth at least $64.96 per share, or 16% higher than today. This assumes that today’s dividend yield of 2.25% stays the same. There is every reason to believe it will.
If anything, the yield is likely to drop, pushing up Intel stock, since the dividend per share hike will make the stock more attractive to investors.
There is also the possibility that Intel will announce the dividend per share increase prior to the announcement of earnings for Q4 2019. Last year the dividend per share increase was announced on January 24, along with the Q4 earnings. But in prior years, it has sometimes made earlier announcements.
Intel stock will likely benefit from the expected dividend hike and the higher buyback program. If you are a shareholder I would continue to hold. If not, it is probably better to buy the stock before the dividend hike announcement sometime between now and late January.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here. The Guide focuses on high total yield value stocks. Subscribers a two-week free trial.