Intel Dividend Continues To Disappoint

Jan.24.14 | About: Intel Corporation (INTC)

Any hopes that investors had for chip giant Intel (NASDAQ:INTC) to raise its dividend this month have now been dashed. I had wondered in the past if Intel was trying to get back on a calendar year cycle, where the dividend is always raised in January. However, with Intel's latest earnings dud, I stated that investors were probably going to be disappointed. Intel was already ahead of its payout ratio target for the dividend, and with another stagnant year in 2014, Intel looked destined to hold the dividend steady. On Thursday, our worst fears were confirmed, as Intel declared a $0.225 quarterly dividend. This is now the 7th straight payment at this rate. At the last two dividend declarations, I heard more and more frustration among investors, and more were looking to bail. Today, I'll discuss where Intel's dividend stands now, how other names are catching up, and why investors will continue to be disappointed.

A plateau is never good:

Investors looking at dividend stocks are looking for companies that continually raise the dividend. In late November, I was forced to reduce my dividend raise prediction as results were still disappointing and I was becoming less positive about 2014 for the chip giant. After the earnings report last week, I stated that Intel would most likely not raise the dividend, and if it did, it would be a penny at most. Intel didn't even give investors a half cent, as you can see from the chart below. The dates in the chart are payment dates.

With 7 straight payments at the $0.225 quarterly rate, investors should be prepared for at least one more payment at the current rate. The next dividend to watch will be the one for the Q3 2014 payout. If that dividend is not raised, we'll be at 9 straight payments at the current rate. Intel could pay out $0.225 for 8 quarters, then raise it. But that assumes that Intel has a decent 2014, and the company has not given any hope so far of that. In the next section, I'll detail why Intel investors are not getting any raises.

Cash flow going to capital expenditures:

Intel is in a very competitive chip industry. The company missed the boat on mobile, and is now trying to play catch up. Intel is looking to really break into the tablet and smartphone market in the next couple of years. In 2014, the company is looking to increase its tablet CPU shipments to 40 million, up from about 10 million in 2013. To break into this competitive space, Intel needs to spend a lot. The company is. I covered this extensively in my previous Intel article, and the following table is the most important part.

Intel's payout target for the dividend is 40%, so it has been above that rate in each of the past three years. The company guided to flat operating income in 2014, and net income could actually decline for the third straight year. Additionally, capital expenditures are expected to be $11 billion, up about $300 million from 2013 levels. For Intel to get to a 40% payout rate with the current dividend, the company needs an extra $1 billion in free cash flow this year. All of it needs to come from operations, which might be tough to do. That's why Intel did not raise the dividend this week.

How does the dividend get raised this year?

There is still a chance that Intel raises the dividend this year, although I would not expect any raises until at least the second half of the year. Intel needs its tablet campaign to start working, and it wouldn't hurt if the PC business ends up stronger than expected. Intel guided to flat revenues and flat operating profits for 2014, along with $11 billion in capital expenditures. When Intel originally provided this forecast in November 2013, investors thought Intel might be sandbagging guidance to set up beats and raises down the road. At last week's report, Intel maintained that forecast.

The silver lining is that we haven't even finished January yet. Current analyst estimates are calling for 0.7% revenue growth this year and earnings per share to decline by two cents to $1.87. If Intel can have a solid first half of the year and maybe raise the yearly forecast over the next couple of quarters, maybe the company can get 1-2% revenue growth and earnings per share approaching $2.00. If that happens, maybe Intel can get the capital expenditures down to $10.5 billion this year or even $10 billion. Remember, Intel started out with a $13 billion forecast for 2013 capex and finished with $10.7 billion. There are a lot of maybes here.

An extra half billion or so from operating cash flow and another half billion from reduced capital expenditures gives us the $1 billion in free cash flow needed to reduce the payout ratio to 40%. Intel needs more than that billion to raise the dividend. With about 5 billion shares outstanding, every penny raise in the dividend costs the company an extra $200 million a year. Investors looking for a dividend raise need to primarily look at raises for the revenue forecast combined with reductions in expenses if they want a dividend raise in 2014.

Everyone else is catching up:

Other top tier tech and chip names are catching up greatly when it comes to dividend yields. I've been comparing Intel to Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Cisco Systems (NASDAQ:CSCO), and Qualcomm (NASDAQ:QCOM) lately. For consistency, I'll stick to those four names here.

A year ago, on January 23rd, 2013, Intel was by far the clear leader in dividend yield. On that day, Intel shares yielded 4.26%, when using actual closing prices (not dividend adjusted). On that day, Microsoft had the second highest annual yield, at 3.33%. Intel had a nearly 100 basis point advantage over Microsoft, and much more over the rest of the group. In fact, Intel's advantage over rival chip name Qualcomm was 272 basis points! That was a crushing advantage at the time.

Fast forward a year to the present day. Intel's dividend advantage has fallen for two reasons. First, Intel has not raised its dividend in the past year. I'll cover the other names' raises in a little bit. Second, Intel's stock is up more than $4 in the past year, despite disappointing results. With a stock rising and no dividend raise, any lead can quickly evaporate. In the following table, I've shown a comparison of yields a year ago versus today, as well as the basis point change. In the second half of the table, I've shown what Intel's basis point lead was a year ago, what it is today, and the change. Numbers may appear slightly off due to rounding.

Intel has not raised its dividend in the past year. Apple raised its dividend by 15% during 2013, with another solid raise expected in 2014. This is especially true as Apple's share count has come down dramatically, and I'll touch on that for Intel in a bit. Microsoft raised its dividend by almost 22%, with Cisco a bit above 21%. Qualcomm raised its dividend by 40% in the past year. Intel still has the highest yield, but with no raise for Intel in 2014, you can expect these others will get a lot closer. Intel's lead has already come down dramatically, as you saw in the table above. Intel's lead over Cisco and Qualcomm is down by nearly 100 basis points in the past year. The lead over Apple is down by more than 80 basis points. The lead over Microsoft is only down by 46 basis points, but that's because Microsoft's yield has dipped too as Microsoft shares are up 30% in the past year. For those that wanted to see the data from the table in a chart form, I've put that below to show the yield changes from January 23rd, 2013 to the same date a year later.

One other consideration:

I've harped on this point significantly throughout 2013, and it is the buyback. Intel's buyback slowed down dramatically in 2013, and that actually caused the quarterly diluted share count for Q4 2013 to be higher than in the prior year period. That hurt EPS, and was one reason why Intel missed analyst estimates.

The buyback is important for the dividend. If the share count is rising, Intel can't pay as much out in dividends per share. Just think logically. If Intel pays $10 to 5 shares, each share gets $2.00. If Intel pays $10 to 4 shares, each share gets $2.50. Now, Intel's share count is not rising dramatically, but it's not falling at a decent clip like it was the past couple of years. A 1% difference in the share count doesn't seem like much, but with a dividend of nearly a dollar, that's a penny on the dividend, and potentially the difference between a raise and no raise.

Intel as an investment:

The weaker dividend plus lack of growth makes Intel a questionable investment right now. In the following table, I've compared Intel with the four names discussed above, in terms of growth and valuation for their respective fiscal years. One quick note. The Microsoft numbers below are as of Thursday, and do not take into account the company's after the bell report. These are analyst estimates, and Microsoft's big beat means its estimates will go higher, and the stock did in the after hours session as well.

*EPS and P/E numbers are non-GAAP.

It's really hard to recommend Intel right now, especially when you have blowout results from Microsoft, and Microsoft trades at a similar valuation. It's extremely hard to recommend Intel over Apple, when Apple offers more growth, a much larger buyback, and trades at a discount. Even if you convert Qualcomm's earnings to GAAP and the P/E goes up to 16 or 17, Qualcomm still offers solid growth that Intel doesn't right now. Remember how I've been arguing about Intel needing to avoid Cisco territory in terms of estimates? Well, Intel estimates for 2014 are now at their lowest point, and going lower it seems.

A key technical point:

Thanks to Thursday's selloff, Intel crossed below its 50-day moving average during the trading day, but shares rallied off the level by the close. The 50-day proved to be a level of support on Thursday, but Intel needs to hold this line in the sand. Should Intel break through the moving average for more than a day or two, it's possible that shares trade down to the 200-day moving average. That's about a dollar lower than the 50-day currently. Additionally, the gap between the 50-day and 200-day moving averages, which recently topped out at about $1.10, is starting to narrow slightly. Intel is nowhere near the dreaded death cross yet, but for now, the 50-day is the key level to watch. A 6-month chart with the 50-day and 200-day moving averages is below.

Click to enlarge

(Source: Yahoo! Finance)

Final thoughts:

In line with most expectations, Intel did not raise its dividend for the first quarter of 2014. With 2014 results expected to be flat compared to 2013, and capital expenditures expected to rise slightly, Intel is a bit above its 40% payout target. Until Intel's results start to turn and the company produces a bit more free cash flow, there will not be a dividend raise. Don't expect a raise until at least the second half of 2014, and even then, I don't see more than a penny or penny and a half if Intel wants to get to an exact cent. Any potential raise is based on the notion that Intel's results come in well above current expectations. If results come in as expected, it may be 2015 or later before a raise.

Intel still has the highest dividend yield when it comes to large cap technology, but other names are catching up quickly as they raise their dividends. Intel is also a less compelling investment at the moment as growth has stagnated and the valuation isn't that exciting compared to others. Intel shares did bounce off the 50-day moving average on Thursday, but might have a hard time holding this level if markets go lower or more dividend investors sell due to the lack of a raise. If you are looking for a company that is consistently growing its dividend, Intel is not where you want to be right now.

For some other thoughts on Intel's dividend, I would encourage you to read two other excellent SA authors:

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: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.