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I'm going to disclose this right now for those of you new to my writings: I think Intel (NASDAQ:INTC) is a great company with a solid future ahead of it. I think that the concerns about the death of the PC are exaggerated, and I further believe that investors are getting carried away with the whole "Intel Missed Mobile" thing. My bet (and it is a large bet) is that over the next year or two, the smoke clears, revenue growth resumes, and sentiment turns positive again.

The company pays a pretty nice dividend and the stock yields about 4.5% at current levels, so for people looking purely for income, Intel's not really a bad bet at current levels, although a REIT or CEF might be more up your alley with much higher yields and much lower price volatility.

Not Dismissing The Challenges

That being said, I worry that people make the same mistake on Intel as they did with Apple (NASDAQ:AAPL). The technology world is fast-paced and largely driven by sentiment and the news wires. Tech companies can experience disruption, and even the mere threat of a future competitive pressure can drive down valuation metrics severely. This, coupled with any missteps in revenue or earnings growth (all a company needs to do is miss expectations) is enough to land the company in the 10-to-1 P/E penalty box indefinitely. It takes a lot to get out of it, and it usually begins with strong revenue growth (so, no, the P/E won't just go up because the stock is cheap relative to peers).

Intel is in that penalty box, and it's going to stay there for awhile. The company is investing heavily in R&D for the future, and as a result of that, coupled with some excess capacity charges taken in 1Q 2013, Intel's EPS shrank in 2012 and is expected to shrink further in 2013 (damned if you do, damned if you don't, right?). The Street isn't convinced that the company's mobile efforts will pay off, and it further isn't convinced that PC demand isn't just going to keep shrinking to the point of no return. The data center business is a bright spot, but even the noise from the ARM (NASDAQ:ARMH) camp is enough to put that segment's future in doubt.

The Street doesn't like Intel because there's a lot of uncertainty. It also doesn't help that the CEO announced an early retirement, and that the company is still trying to figure out who ends up taking Mr. Otellini's place. I think they'll hire someone solid (my bet's on either COO Brian Krzanich or the head of the Intel Architecture Group David Perlmutter), but once again, the Street doesn't like uncertainty, and the stock is punished for it.

It's All About The Dividend

At the end of the day, a stock like this is defined by its ability to grow and protect the dividend. Forget the noise about the death of the PC, the threat from ARM, and other headline-grabbing news. Is EPS going up? Is the payout ratio reasonable? Does the company have a viable path to steady growth? The problem is that right now, the answer to the first question is no, and the answer to the third question is not "certain."

The nice thing is that Intel actually generates a ton of cash, and has been very diligently raising its dividend:

INTC Dividend Chart

INTC Dividend data by YCharts

While the new product introductions and other "catalysts" that the traders are gong to trade on can make for some interesting swing trading, the company's ability to really outperform in 2H 2013 will not only affect sentiment, but it will determine how strong the dividend growth going forward will be (in the eyes of the Street). If Intel can get net income and EPS back on the upswing, then the dividend growth investors will be back (I suspect they're all in much "safer" names like Johnson & Johnson (NYSE:JNJ) or Verizon (NYSE:VZ)), as the yield will not only be seen as sustainable, but potentially much higher in the future at the current levels. This would be enough to drive the stock back up to at least the $23-$24 level, if not higher, given a dividend increase.

Conclusion

At the end of the day, it's all about revenue and EPS growth. If Intel can deliver on a strong 2H 2013 on the EPS side, then the dividend growth folks will be back, and sentiment will change. It will start with the product refresh cycle, but the proof will ultimately be in the earnings results.

Source: Intel: It's All About Dividend Growth