In this article, I will review the shares of Intel (INTC) to determine if now might be a good time to be an equity holder. Specifically, we will look at three areas that I believe are worthy of attention:
- Book equity growth and historical multiple
- Dividend payout rates
- Capital structure
The Book Equity Picture
Book equity of INTC has grown 5.9% over the last five years as illustrated in the table below. Based on Friday's closing price of $21.33 and the year-end book value per share of 10.05BB, INTC is trading at 2.12 x Book, which is at the extreme low end of the historical average. When you incorporate the fact that INTC is trading at near the low of the historical book multiple and the company has been growing book value per share by both retiring shares and increasing absolute book value, it suggests that now might be a good time to own the shares. Next we will look at one reason why the shares may be held back.
In the table below you can see that the long-term debt and corresponding leverage of INTC has gone from 1.185BB to 13.136BB and 3.0% to 25.7% respectively. I am not saying that now is not a good time to lever your balance sheet with rates at historic lows. What I am paying attention to is how much capital it is taking to deliver those returns and what the impact might be.
Based on year-end capital deployed, ROIC is 17% for 2012. ROIC in 2008 was 13% and peaked in 2011 at 24%, which is an extremely plausible reason why the stock ended 2011 at $24 and ended 2012 at just shy of $21. So, what should we make of all of this?
The last thing I want to look at in this analysis is the dividend payout rate. In the table below, you will see the historical payout rate for INTC.
The dividend payout ratio based on both net income and cash on hand suggest that we have a dividend that is stable for the foreseeable future.
Based on the analysis above, I believe the following scenario will play out:
- The stock will move slowly higher supported by a growing book value with a target of $26 - 28 by year end.
- The dividend yield is attractive and stable for the upcoming year.
Based on these two beliefs, I intend to enter a long position of INTC and add a NTM covered call with a Jun Xpiry to juice my return. I am willing to give away a sharp move higher for more "yield" because I believe a sharp move higher is far less likely than a sideways to fade up.