In a previous article, I provided a look into IBM's Owner Earnings, Owner Earnings Yield And Payback Years. I explained the concepts and the process I used to get those values.
In this article, I will provide you with a look into Intel's (INTC) Owner Earnings, Owner Earnings Yield And Payback Years. First, I'll give just a brief summary of each concept, then I'll spoon feed you the results for easy consumption. I'll then provide a quick summary plus implications for INTC investors.
Warren Buffett on Owner Earnings
I like how Buffett explains Owner Earnings in his 1986 annual letter. It looks like this:
"If we think through these questions, we can gain some insights about what may be called "owner earnings." These represent (A) reported earnings plus (B) depreciation, depletion, amortization and certain other non-cash charges such as the Company N's items (1) and (4) less ( c) the average annual amount of capitalized expenditures for plant and equipment, etc. that the business requires to fully maintain its long-term competitive position and its unit volume. (If the business requires additional working capital to maintain its competitive position and unit volume, the increment also should be included in ( c) . However, businesses following the LIFO inventory method usually do not require additional working capital if unit volume does not change.)
Owner Earnings =
Reported Earnings (also known as Net Income)
+ Depreciation, Depletion and Amortization
+ Other Non Cash Charges
- Maintenance Capital Expenditures
- Increase / (Decrease) in Working Capital
NOTE: Just in case you're wondering, I will treat all CapEx as "Maintenance Capital Expenditures" to keep things simple. Jae Jun's stock analyzer (which I enjoy using) does the same. The impact is that this discounts the fact that some CapEx is used for growth, not just for keeping a business operational. In other words, when all CapEx is treated as Maintenance CapEx, Owner Earnings is more conservative. Caveat emptor.
To be perfectly clear, I use Jae Jun's Old School Value "Stock Analyzer" program. The formula you see above is captured in that tool.
Owner Earnings Yield and Payback Years
I'll keep things simple here. You already understand Owner Earnings because I've defined that above. So, let's look at how to calculate Owner Earnings Yield and Payback Years.
Here's Owner Earnings yield, per my previous article:
First, I grab the average Owner Earnings generated by the company over the last 3 years. Then, I divide the Owner Earnings by the number of shares outstanding. This provides me with the Owner Earnings per share. This is a beautiful thing because it tells me the actual dollar amount each share generates.
Second, I take the Owner Earnings and I divide that dollar amount by the price of a share in the business. This gives me one of my favorite metrics: Owner Earnings Yield.
And, here's Payback Years:
I take the price that I paid for the stock and I divide that by Owner Earnings per share. This gives me "Years to Pay Back" or simply, Payback Years. Again, this tells me how quickly the Owner Earnings will pay me back for my hard cash investment.
Rubber Meets the Road: INTC Through the Eyes of an Owner
Let's look at INTC's Owner Earnings over 10 years, 5 years and 3 years. Note that for my actual Owner Earnings calculation I will use the 3 year average. Here's how the numbers look according to Jae Jun's Stock Analyzer program over the full 10 years:
NOTE: Please look at the row called Owner Earnings FCF. That's the Buffett-style Owner Earnings calculation, year by year.
I like to average the 10-year, 5-year and 3-year Owner Earnings to get a feel for how Owner Earnings are improving (or not) over time.
For your convenience, here are the 10-year, 5-year and 3-year averages:
- $7,963.3 million (10 year)
- $8,512.6 million (5 year)
- $9,545.7 million (3 year)
Next, take the 3-year average and divide by the number of shares outstanding (4.98 billion according to Yahoo). That gives me an Owner Earnings per share value of $1.92 per share.
Next, with today's price of about $24.43 we're looking at an Owner Earnings Yield of about 7.9%.
And, lastly, we flip things around and divide the $24.43 by $1.92 per share and we get about 12.7 Payback Years.
Wrap Up and Implications
With an Owner Earnings Yield of 7.9% you're getting a 7.9% return on your money. The number is actually substantially higher if you believe that INTC creates more money when it reinvests in growth. But, from earnings alone, we can still observe a 7.9% yield.
Furthermore, we know that with a $0.90 dividend that INTC has reasonable coverage considering its Owner Earnings of $1.92 per share. About 47% of Owner Earnings are going to dividends.
I'll summarize by saying that these metrics are important to me because they indicate that INTC is generating respectable amounts of real "owner" cash. They are also a wonderful starting point for deeper analysis. How is INTC reinvesting cash? How is INTC returning cash to investors? Is INTC properly investing my Owner Earnings? How does INTC compare to IBM and the entire Technology Industry?
My final gift is a FASTgraph view of INTC. It appears that INTC is slightly undervalued at this time. As a reminder, please conduct your own due diligence.