Intel Corporation (INTC) is the largest chip manufacturer in the world. Intel's main competitor in the PC and Server business is Advanced Micro Devices (AMD).
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Intel offers a variety of platforms, including the low cost Atom processor used in netbooks and the Xeon and Itanium processors used for enterprise applications. Intel is currently making a push into the smartphone and tablet markets, a space dominated by ARM processors designed by ARM Holdings (ARMH). ARM processors are based on a different architecture than Intel's x86 architecture and are ideal for low-power applications, such as mobile devices.
Many companies such as Nvidia (NVDA) and Qualcomm (QCOM) design mobile chips around the ARM architecture. Windows 8, Microsoft's (MSFT) new operating system set to launch later this year, will for the first time offer a version compatible with ARM processors. Needless to say, Intel will face serious challenges trying to take market share away from ARM.
Intel currently trades at about $26 a share with a 3.2% dividend yield. Here is the ten-year dividend history:
| Year | Dividend | Growth |
|---|---|---|
| 2002 | $0.08 | 0% |
| 2003 | $0.08 | 0% |
| 2004 | $0.16 | 100% |
| 2005 | $0.32 | 100% |
| 2006 | $0.40 | 25% |
| 2007 | $0.45 | 12.5% |
| 2008 | $0.55 | 22.22% |
| 2009 | $0.56 | 1.82% |
| 2010 | $0.63 | 12.5% |
| 2011 | $0.78 | 23.81% |
Since Intel began seriously growing its dividend in 2004, the only year that saw growth less than 12.5% was in 2009. In 2011, the dividend grew nearly 24%. I'll calculate the payout ratio as a percentage of free cash flow. The results are shown below.
| Year | Free Cash Flow (Mil $) | Float (Mil Shares) | Payout Ratio |
|---|---|---|---|
| 2002 | $4,426 | 6,759 | 12.22% |
| 2003 | $7,859 | 6,621 | 6.74% |
| 2004 | $9,276 | 6,494 | 11.20% |
| 2005 | $9,005 | 6,178 | 21.95% |
| 2006 | $4,841 | 5,880 | 48.59% |
| 2007 | $7,625 | 5,936 | 35.09% |
| 2008 | $5,729 | 5,748 | 55.18% |
| 2009 | $6,655 | 5,645 | 47.50% |
| 2010 | $11,485 | 5,696 | 31.24% |
| 2011 | $10,199 | 5,411 | 41.38% |
The payout ratio has fluctuated over the years, but has remained fairly low, just 41% in 2011. This should leave Intel room to grow its dividend substantially in the coming years.
Valuation
I will use the Dividend Discount Model to put an estimated value on the company. This model assumes that the value of a company is purely the sum of all future dividends discounted back today. This is a reasonable valuation method if you are a dividend investor. The discount rate should be your required rate of return, and I will use a discount rate of 8%, which is roughly the long-term growth rate of the market as a whole.
I will assume that the dividend will grow by 12% next year, and then let that growth rate decay over 20 years to a perpetual growth rate of 3%, as per the growth table below.
| Year | Dividend Growth Rate |
|---|---|
| 2012 | 12% |
| 2013 | 11.55% |
| 2014 | 11.10% |
| 2015 | 10.65% |
| 2016 | 10.20% |
| 2017 | 9.75% |
| 2018 | 9.30% |
| 2019 | 8.85% |
| 2020 | 8.40% |
| 2021 | 7.95% |
| 2022 | 7.50% |
| 2023 | 7.05% |
| 2024 | 6.60% |
| 2025 | 6.15% |
| 2026 | 5.70% |
| 2027 | 5.25% |
| 2028 | 4.80% |
| 2029 | 4.35% |
| 2030 | 3.90% |
| 2031 | 3.45% |
Using the above parameters, I arrive at an estimated fair value of $32.60 for a share of Intel.
Conclusion
Intel's dividend has seen significant growth over the last decade, and with a low payout ratio and a push into the mobile market, we should see continued strong growth for years to come. Intel is currently trading at a 20% discount to my fair value estimate, offering a dividend investor a good yield and ample growth at a fantastic price.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
