Intel Corporation (NASDAQ:INTC) is the ideal dividend income stock. The company’s earnings have increased significantly based off of historical numbers and the company has experienced a great increase in free cash flow as well. With an impressive historical dividend track record, this stock is a good bet for investors looking for a dividend income stock.
However, there is another tech sector stock that rivals INTC for the top spot and that is Microchip Technology (NASDAQ:MCHP). MCHP has a very impressive dividend history as well and the company has experienced an increase in free cash flow and earnings over that past few years. But there are certain details that have me ranking MCHP one notch below INTC.
INTC is the largest, leading microchip producer in the world and the company is best known for developing and manufacturing microprocessors for the personal computer. Recently, INTC experienced record revenue that resulted in its most profitable quarter ever.
When INTC released its earnings report for the third quarter of 2011 on October 18, 2011, there was much for investors to get excited about. INTC recorded revenues of $14.3 billion, up 9% from the second quarter; operating income of $5.1 billion, up 20% from the second quarter; net income of $3.7 billion, up 15% from the second quarter and finally an earnings per share of 69 cents that was up 17% from the previous quarter. Also to note is the fact that these reported numbers are all up from the third quarter of 2010 as well. An additional important measure to look at when assessing dividend paying stocks is free cash flow. INTC has experienced an increase in free cash flow of 73%, up from $6,655,000 in 2010 to $11,485,000 in 2011.This is further proof that INTC is a stock for investors to keep an eye on.
INTC has been gradually becoming more of a favorable stock for investors interested in dividends. Evidence of this is found when looking at the average growth that INTC dividends have experienced. In the past 10 years alone. INTC dividends per share have increased from $.08 per share to $.63 per share. When comparing INTC to its competitor Texas Instruments (NASDAQ:TXN), also a dividend paying stock, we can see that INTC is the better bet. This is due to INTC’s payout ratio being 32% compared to TXN’s payout ratio of 22%. Also worth looking at is INTC’s forward annual dividend yield of 3.7% compared to TXN’s yield of 2.4%. However, Microchip Technology is another competitor and is one that rivals INTC when compared head to head.
MCHP is the leading supplier of microcontrollers that are used in the semiconductors found in many electronic devices. What makes MCHP a challenger to INTC as the ideal dividend income stock is its recent dividend history. Since November 2002, when MCHP started paying dividends, its dividend per year has increased from $.04 per share to $1.37 per share. Also, MCHP’s payout ratio is 68% compared to INTC’s payout ratio of 32% and MCHP’s forward annual dividend yield of 4.3% trumps INTC’s yield of 3.7%. MCHP is the leader of the two companies based off of these metrics. But we need to look at MCHP’s earnings compared to INTC as well.
MCHP recorded revenue of $367.8 million in the third quarter of its fiscal year 2011. This is down 3.8% from the second quarter of 2011 but up 47.1% from revenue reported in the third quarter of its fiscal year 2010. Operating income was also down from the previous quarter. MCHP reported operating income of $117.5 million and this was down 2.7%. However, operating income for the third quarter 2011 was up 46.9% from the third quarter of 2010. MCHP has also seen an increase in free cash flows from 2010 to 2011 of 13.4%.
When comparing INTC’s earnings and MCHP’s earnings, we see that INTC is generally in a better financial position. INTC is outperforming MCHP in the third quarter with increases across the board and INTC’s increase in free cash flow is significantly greater than that of MCHP. It is easy to see from this perspective that INTC is the better bet for a dividend income stock because the company has more free cash flow to pay out as a dividend. However, MCHP’s dividend per share has seen a more significant increase than INTC dividend per share and its payout ratio is more impressive as well. What this boils down to is whether or not the decrease in earnings for the quarter will have an effect on MCHP’s ability to continue to increase its dividend paid out per share in the future. INTC has provided an increase in dividend per share historically as well but not to the same extent that MCHP has. But, on the other hand, INTC’s earnings are more impressive than MCHP.
It is imperative to determine whether or not there is long term sustainability in these two companies and that is the deciding factor on which one is ideal. Both companies are growing as far as earnings is concerned and the management of both companies seem to be taking the right steps in order to be successful in the long run. INTC has taken its business model globally and this is what has made INTC the industry leader in microchip development. With the recent record fiscal quarter and the explosive increase in free cash flows seen over that past two years, I would rate INTC as the ideal dividend income stock. MCHP is a company to keep an eye as well, and it will be exciting to see them challenge INTC in the future. But for now there is not enough compelling evidence to suggest them as the dividend leader.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.