Intel Corporation (INTC) is an old tech company in some people’s opinions. The company grew rapidly during the dot-com boom. But Intel continued to evolve and became the dominant player in chips for PCs, servers, and data centers. The acquisition of Mobileye may make Intel a market leader in autonomous and assisted driving systems. Currently, the market is not expecting much from Intel and is assigning it a low earnings multiple due to greater competition and challenges for implementing 7 nm technology. Intel is arguably undervalued. The stock price is still down about 13% year-to-date and trading where it was in early-2018. I view the stock has a long-term buy for dividend growth investors.
Overview of Intel
Intel is one of the world’s largest semiconductor companies. The company was founded in 1968 and is headquartered in Santa Clara, California. The company operates in six business segments: Data Center Group, Internet of Things Group, Non-Volatile Memory Solutions Group, Programmable Solutions Group, Client Computing Group, and All Other. The company sells CPUs and chipsets, systems-on-chip, NAND flash memory, programmable semiconductors, server boards, etc. The company acquired Mobileye and is now offering autonomous driving and assisted driving technologies. Customers include PC makers; manufacturers of cell phones, Wi-Fi, and Bluetooth products; cloud data centers, communication infrastructure, and more. Intel is ranked 13 in the 2019 Interbrand’s Best Global Brand list. Intel had $71,965 million of revenue in 2019.
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COVID-19 Pandemic Is Driving Sales
Intel recently reported better than expected results for Q2 2020 results. Second quarter revenue was up about 20% and earnings per share was up 16% year-over-year. The COVID-19 pandemic is driving PC and data center sales for Intel.
Rising PC sales during the pandemic is benefitting Intel. Reportedly, global PC shipments rose 11% to 72.3 million in the quarter. The U.S. posted the highest quarterly shipment volume in over a decade. Demand is high as virtual schooling is driving sales of laptops and notebooks for students at all ages. In some school districts the entire student population is being issued a computer. PC manufacturers like HP (HPQ) and Dell (DELL) are reporting higher sales. In addition, teleworking is seemingly here to stay at least into 2021. Remote work is also driving PC sales.
On the data center side, strong server demand is benefitting Intel. The Data Center Group had a 43% gain in revenue and 72% gain in operating income in comparable quarters. Growth was broad based including cloud, enterprise, and communications. It is likely that growth will slow some in the next few quarters, but demand will probably remain elevated as cloud-based platforms grow and 5G is rolled out.
Undervalued Intel Has Excellent Dividend Safety
Intel has paid a dividend since 1992. But it was not until 2004 that the dividend started growing at a decent clip. Since then, there have been a few years where Intel did not raise the dividend, such as the Great Recession and during 2013 to 2014. However, currently the company has raised the dividend for 6 straight years making Intel a Dividend Challenger. This is not a long time when compared to some conventional choices for dividend growth stocks. The growth rate was about 8.5% over the past decade. It has slowed some recently, and the trailing 5-year growth rate is approximately 7%.
Intel pays an annual forward dividend of $1.32 and is yielding approximately 2.6%. The current yield is greater than the roughly 1.8% yield offered by the S&P 500 index. Granted, the yield is not too high when compared to other old tech companies. Cisco Systems (CSCO) is currently yielding 3.7%, and International Business Machines (IBM) is currently yielding over 5.5%. But Intel’s forward payout ratio is much lower at about 27% based on consensus 2020 earnings per share of $4.85. This provides room for further growth without interruption.
Intel’s trailing dividend safety metrics are excellent. In 2019, the payout ratio was approximately 27% based on a regular annual cash dividend of $1.26 and diluted earnings per share of $4.71. The dividend was also well covered by free cash flow. In 2019, operating cash flow was $33,145 million and capital expenditures were $16,213 million giving free cash flow of $16,932 million. The dividend required $5,559 million giving a dividend-to-FCF ratio of about 33%. Both the payout ratios and free cash flow coverage are rock solid and provide a cushion in a cyclical industry. I used TIKR* for the data in this analysis.
Debt is not much of an issue from the perspective of the dividend. Total debt was about $29,551 million at end of 2019 offset by $13,123 million in cash and investments. The leverage ratio is well below 1X and interest coverage is over 50X.
Intel is Undervalued
Intel is very undervalued at the moment. The company is not really participating in the recent bull market for tech stocks. The stock is trading at about 10.7X consensus 2020 earnings. This is well below the earnings multiple of the S&P 500, which is trading at nearly 29X earnings.
Some of Intel’s undervaluation is likely due to increased competition from Advanced Micro Devices (AMD), Taiwan Semiconductor Manufacturing Company (TSM), and Nvidia (NVDA). The latter announced a $40 billion acquisition of ARM. There is also some negative sentiment surrounding Intel due to delays in increasing the density of its chips and moving to 7 nm, and loss of the Apple (APPL) computer business, which is moving to in-house chips. That said, Intel is still the market leader in semiconductors and recently launched the Tiger Lake architecture. Intel’s Xeon processors are market leaders in servers and data centers.
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In an arguably very overvalued market, Intel offers income, dividend growth, and some upside in share price at a reasonable valuation. I view the stock as a long-term buy.
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