Recently, Intel (NASDAQ:INTC) reported solid third-quarter results that were overshadowed by a minor one-quarter delay in the release of its next-generation Broadwell chip. We're not reading too much into the modest setback and continue to be happy with the firm's excellent cash-flow generation and significant financial flexibility.
During the period, Intel generated $5.7 billion in cash from operations (42% of sales) and about $2.8 billion in free cash flow (nearly 21% of revenue). These are staggeringly positive numbers for a firm dealing with a PC market that is in secular decline. Intel is also sitting on $19 billion in total cash investments (cash, short-term investments and trading assets) relative to $13.2 billion in long-term debt, revealing a very healthy balance sheet (and net cash position).
The chip-maker's financial strength and ongoing strong cash-flow performance give us confidence in its ability to continue raising its dividend long into the future. Shares currently yield roughly 4%, and the firm boasts an impressive Valuentum Dividend Cushion score of 2.3 - meaning it can cover future expected cash dividend payments (including growth in them, as outlined in our dividend report) with future expected free cash flow and net cash on the balance sheet 2.3 times during the next five years. We think dividend growth above and beyond our 8%-12% annual expectation is very likely.
Looking ahead, Intel issued a fourth-quarter revenue outlook that was below expectations, though its reduced capital spending guidance for 2013 (now $10.8 billion, was $11 billion) should further boost free cash flow (cash from operations less capital expenditures). The firm's gross margin is expected to come in at 61% ("plus or minus a couple percentage points") in the fourth quarter, though we note the chip-maker's third-quarter gross margin was 140 basis points above the same previously-issued guidance midpoint (62.4%). We're expecting profit upside relative to the company's internal forecasts for the period.
It's hard not to like Intel's dividend strength given the firm's robust financial health and cash-flow generating prowess. We'll be monitoring the Broadwell chip's development in coming months and general trends in the core PC market closely (including global inventory levels, which advanced during the third quarter), but we're not panicking at all. We are comfortable holding the firm in our actively-managed portfolios and expect the announcement of a meaningful dividend increase in the next few quarters.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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: INTC is included in the portfolios of our Dividend Growth and Best Ideas Newsletters.