Usually when investors are studying technology stocks, they are searching for double-digit revenue growth, not dividend income. Nevertheless, many companies in the technology sector have grown so much that they can't reinvest successfully all the cash they are generating.
Intel (INTC) is one of those mature technology companies, and since 1992 it returns some of its generated free cash flow to shareholders in the form of a cash dividend. Below I will illustrate that Intel at its current price level is the perfect stock for the long-term investor that is looking for good yield and a sustainable, growing dividend.
Intel has grown its dividend at a 31% average rate for the last decade. Excluding its two 100% increases in 2004 and 2005, the dividend's average growth rate drops to a more sustainable but still satisfying 16%.
For the last decade, Intel's revenue grew, on average, at an 8% annual rate. Due to its large operating margins (that ranged between 16% and 35%) the company managed to grow its earnings by an average 24% rate. Its EPS grew even more at a 27% rate, boosted by Intel's extensive stock buybacks. On average, Intel has reduced its shares outstanding by 3% every year.
Intel's business is inherently tied to the health of the US and global economies, and both its revenue and profit margins shrink in recessions. However, due to its competitive advantages in production and R&D, the company is able to make up for the lost ground, even in a mild recovery like the one we are experiencing since the 2008 financial crisis. You can learn more about Intel's competitive strengths here and here.
Now let's check Intel's financial strength. As you can see below, Intel is essentially debt-free, since its debt totals less than its cash and short-term investments. In 2012 the company decided to take advantage of the extremely low interest rates and borrowed $6 billion to buy back additional stock.
Intel's financial health will remain strong even in an extreme scenario of high interest rates. Even at a high 15% rate, its $2 billion interest on its $13 billion debt would still be just a small fraction of its $14 billion of operating income. Furthermore, Intel's dividend is less that 60% of its FCF and below 50% of its earnings.
Intel still has a lot of growth potential ahead, and I expect it to manage at least 3% to 5% average revenue growth for the next decade or so. Add in its shareholder-friendly culture, its stellar balance sheet and its current 4.3% dividend yield, and you have the perfect dividend stock trading at an excellent entry price.
Disclosure: I am long INTC.