Intel And Mattel May Increase Dividends And Offer Upside Surprises

| About: Intel Corporation (INTC)


Intel is finding two important ways to increase revenue and earnings to pay higher dividends.

Mattel, the world's largest toy manufacturer, can sustain current dividend and raise it later.

Both companies are market laggards, so investors may experience some upside surprises.

"Never overpay for a stock. More money is lost than in any other way by projecting above-average growth and paying an extra multiple for it." - Charles Neuhauser (formerly of Bear Stearns).

When it comes to the bellwether tech colossus Intel (NASDAQ:INTC) and the world's largest toy manufacturer Mattel (NASDAQ:MAT), right now is a good opportunity to not overpay for their shares.

Intel shareholders enjoy a 3.7% dividend and many are concerned if the company has enough cash to sustain that generous payout. Most want a dividend increase as well.

Intel stock is down about 5% year to date as of the Friday's (March 6th) closing price of $24.64. This is over 9% below the 52-week high of $27.12. INTC has a forward (1-year) PE of 12.4.

So investors were understandably happy when CEO Brian Krzanich told Fox Business on March 4th that as part of Intel's strategy to expand its presence in the mobile device market, the company expects to ship 40 million tablet processors in 2014 compared to about 10 million in 2013.

That quadrupling of the demand for the company's microprocessors for tablets will have a positive impact on revenue, earnings and free cash flow this year.

Krzanich also reiterated Intel's progress in the promising wearable technology space. During this year's Consumer Electronics Show in Las Vegas, Intel unveiled several products, including an earpiece and smartwatch.

It also took the opportunity to announce the next generation of its Quark chips used in wearable products. More sales growth and another earnings opportunity.

"We have a strong line," Krzanich said, hinting at a "series of announcements" coming up. "You can expect a lot more wearable products this year."

The maker of microprocessors and integrated digital technology platforms has raised the dividend every year from 2004 to 2012. Last year was the first time in 10 years it didn't increase it.

Sources such as Marc Lichtenfeld, the Chief Income Strategist for The Oxford Club, believe Intel wants to surprise investors later this year with a dividend increase. Along with positive news about its sales growth and profits, the share price should test the 52-week high in the year ahead.

As of the end of 2013 Intel had nearly $8 billion in free cash flow and over $20.2 billion in total cash. It paid out $4.5 billion in dividends last year, which is a payout ratio of about 48%.

With the above-mentioned exceptional headway in its products, including a huge initiative to expand sales from its wholly-owned subsidiary McAfee and its full-featured version of its award-winning McAfee Mobile Security, total cash and free cash flow will grow too.

That should make it possible for the much-anticipated dividend increase which should help goose the stock price higher. By the way, Intel is not an embarrassment as one analyst recently suggested.

"You Can Tell it's Mattel, It's Swell!"

You may remember that old TV jingo from decades gone by. Mattel didn't have a swell holiday season in the last quarter of 2013.

The company saw a 10% drop in fourth-quarter sales in North America which is its largest market. Yet its trailing twelve month (TTM) operating margin was a robust 18.3% and its year-over-year quarterly EPS (earnings-per-share) rose a healthy 20.5%.

Shares of Mattel trade at a forward PE ratio of only 13 and a Price-to-Sales ratio of a modest 1.99 according to Yahoo! Finance.

These are reasons why Mattel maintained its generous $1.52-per-year dividend, which at a share price of $37.60 is a dividend yield of nearly 4%.

To be more certain that the company can reassure shareholders and maintain revenue growth in the year ahead, it recently agreed to buy Canada's Mega Brand for a tad above $366 million.

This will give it a presence in the construction toys segment that has been dominated by the Danish company Lego. Mega Brands had annual sales of nearly $400 million and has the chance to compete with Lego whose sales last year were close to $4.7 billion.

The astronomical success of Warner Brothers' "The Lego Movie," which has so far grossed over $210 million, should help drive demand for Lego-like construction blocks.

As Mattel's CEO Bryan Stockton said on the day the deal was announced, "The direction we chose to take was to try to generate more consistent [sales] growth." The deal is likely to dampen earnings in 2014 but be accretive to earnings starting next year.

So how will the company maintain or even grow its hearty dividend payout in the time being? A recent Reuters report helped shed light on the answer.

Mattel is planning to come to the US debt market in the second quarter after announcing the Meg Brands deal. "A-minus rated Mattel rarely comes to the bond market, which should mean strong demand from investors," the report commented.

Its last debt offering was in March 2013 for US$250 million of 3.15% 10-year notes maturing in 2023 and US$250 million of 1.7% five-years. This time around it will seek $500 million through the bond market.

"We expect the [Mega Brand] deal to be funded with cash, and it is slated to close in the second quarter of 2014," said Mattel CFO Kevin Farr.

"We expect to issue additional debt of about $500 million for general corporate purposes early in the second quarter, which should get us close to our targeted debt to total capital ratio of about 35% at year-end 2014."

The company's current dividend payout ratio is a somewhat high 55%. With its efforts to expand its product line including video games and now construction blocks, I agree with the recent article that "Mattel Hits Home Run..." and is on the road to rejuvenation.

For now, Mattel's dividend is well-covered and analysts estimate its 1-year target stock price is over 10% higher than current levels. The Mega Brands purchase will help drive the stock's value by year's end.

"Demand for Lego blocks has been growing at the expense of action figures and preschool toys, with Lego sales up 10% in a sluggish global toy market last year," Reuters reported.

"Mattel currently has less than a 1% share in the (construction toy) category," Mattel CEO Bryan Stockton told analysts on the call.

"This is the single largest toy category where Mattel does not play," the CEO also stated. That will all change when the deal is sealed in the 2nd quarter 2014.

Summary and an Optimistic Conclusion

With the progress and proactive initiatives that both Intel and Mattel are undertaking, the future growth prospects for these companies looks much rosier.

Both companies are shareholder-friendly, and I anticipate each raising the dividend payout as soon as possible. This bodes well for the stocks' prices which have lagged the overall market.

Investors are paid a healthy dividend for owning shares of Intel and Mattel, and those dividends may swell. The likelihood of overpaying for these two stocks are minimal at today's prices, and the total return a year from now should be very satisfying.

Patient investors are recognizing the value proposition that Intel's and Mattel's stocks offer. Both trade at modest forward PE ratios.

Shareholders are likely to experience some upside surprises as the companies' officers do all they can to boost the share price with more unexpected good news that'll restore optimism and confidence.

Disclosure: I am long INTC, MAT. 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.