The thesis of this article is to examine the case for a continuing investment in Intel (NASDAQ:INTC). INTC has managed to significantly underperform the market since July, leaving equity holders with a loss on capital. The dilemma faced by shareholders is to sell now and realize the loss or to wait and hope for a rebound making them whole again. The article below will make the case for a patient approach citing three main factors for the continuing investment in the company.
I published my original bullish thesis on INTC in July 2012 and followed up with a review in September of the same year. The basic points that appealed to me then are still valid today however my timing was quite simply atrocious. My initial position was opened at $26 per share and I have made a subsequent smaller (10% more) purchase in October after their earnings announcement. The dividend collected has been reinvested into the shares leaving me with a net loss of 17%. Not exactly what I had in mind when initially making the investment but the reality of events going against me.
When evaluating whether to exit or maintain the position one needs to evaluate the dividend yield offered by the security. If the stock is indeed "dead money" reinvesting the yield helps cushion the blow from bad timing. In the case of INTC the yield currently offered is 22.5 cents per share for an annual yield north of 4% a year. The company has an enviable track record of raising the dividend on a yearly basis as evidenced by the virtual doubling of the dividend since 2007. The consistent quarterly payments allow an investor to consistently purchase additional shares at a more advantageous price lowering the overall average price per share paid.
Annual dividend amount per share
The second point to consider is the stability of the company's product. The end demand for the company's product not only fuels further earnings growth but also allows it to continue to pay out a share of the profits to shareholders. As we can see from the chart below the end demand for INTC products remains robust. With all the negative press and significant decline in the price of INTC shares one would think that sales are off significantly. As we can see from the chart below sales were actually down less than 2% from the year before and are up sharply when compared to previous years. Using the same timeframe as above cited dividend argument, we see that sales are up over 60% in the same timeframe.
Sales in Billions of US dollars
INTC is a stable mature company with an enormous amount of annual sales. The sales are not deteriorating at a rapid rate instead reflect the inherit cyclicality of the semiconductor industry. Even in what appears to be a cyclical trough the sales and earnings generated by the company are more than sufficient to cover the dividend. This allows an investor to "get paid" for waiting for the next cyclical upturn in the industry.
The third factor to consider has nothing to do with the company in question but revolves around percentages. If an investor were to sell their position in INTC at a loss of 17% they would need the next investment to generate a return in excess of 20% just to break even. A 20% gain is certainly doable however the next question to ponder, how sure the investor is that they can achieve that gain. The ability to achieve that gain must also be viewed in the context of in the same time frame what are the odds of the original investment makes up the lost ground. There are no easy answers to the above posed questions and each individual investor must make up their own minds as to how to proceed from here.
In conclusion my initial investment in INTC is at a bit of a crossroads. After pondering the above cited factors, I have decided to hold my current position and will reinvest all dividends received. I am comfortable with the stability that INTC sales and dividend provides. INTC is a mature company that will certainly be around for a while allowing me to hopefully quickly recoup my losses. Thank you for reading and I look forward to your comments.
Disclosure: I am long INTC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The article is for informational purposes only. Thank you for reading and I look forward to your comments.