Cisco Vs. Intel: Which One Will Provide Superior Dividend Growth?

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 |  Includes: CSCO, INTC
by: Alexander J. Poulos

The focus of this article will be to compare Cisco Systems (NASDAQ:CSCO) and Intel Corp. (NASDAQ:INTC) - two wide moat tech behemoths. The article is written from the prospective of a long-term investor who is seeking above average dividend yield and growth. I will be using five key points to determine which should make the superior investment going forward.

CSCO: As of Monday, 08/20/2012

+0.77 (4.23%)

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Details

Today's Open

$19.00

Previous Close

$19.06

Day's Range

$18.82 - $19.15

52 Week Range

$14.93 - $21.30

Beta

1.24

Average Volume (10 Day)

56,784,615

Put/Call Ratio (1 Day)

0.5

Put/Call Ratio (30 Day)

0.5

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Earnings TTM (GAAP)

Details

Earnings Per Share (08/15/2012)

$1.4875

Price/Earnings

12.81

Forward P/E

9.96

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Dividends

Details

Quarterly Dividend

$0.14

Annual Yield

2.94%

Next Ex-Date

Oct 02, 2012

Next Pay Date

Oct 24, 2012

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Shares

Market Capitalization (Large Cap)

$101.0B

Shares Outstanding

5.357B

Shares Held By Institutions

70%

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INTC: As of Monday, 08/20/2012

+1.93 (7.94%)

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Details

Today's Open

$26.22

Previous Close

$26.33

Day's Range

$26.10 - $26.33

52 Week Range

$19.16 - $29.27

Beta

1.09

Average Volume (10 Day)

26,530,974

Put/Call Ratio (1 Day)

0.7

Put/Call Ratio (30 Day)

0.3

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Earnings TTM (GAAP)

Details

Earnings Per Share (07/17/2012)

$2.3615

Price/Earnings

11.15

Forward P/E

11.00

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Dividends

Details

Quarterly Dividend

$0.225

Annual Yield

3.42%

Previous Ex-Date

Aug 03, 2012

Next Pay Date

Sep 01, 2012

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Shares

Market Capitalization (Large Cap)

$131.0B

Shares Outstanding

5.003B

Shares Held By Institutions

61%

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Charts and Financial information courtesy of Charles Schwab.com

As we can see from the financial information above, CSCO pays a slightly lower dividend rate (2.94% vs. 3.42%). At first glance, it would be easy to simply pick INTC as the superior play due to its higher current yield. On CSCO's most recent conference call, Frank A. Calderoni, executive vice president and chief financial officer, stated: "Going forward we intend to our capital allocation strategy to return a minimum of 50% of our free cash flow annually to dividend and share repurchases while providing sufficient financial flexibility to effectively invest in the business and strategic opportunities." Due to this statement, I will rate them as even for now and will use further criteria to narrow down my choice.

The second criteria will be the consistency of the business or "moat". CSCO has a wide moat due to its dominance in internet protocol. For a more in-depth review of CSCO's business, please see this. INTC moat is quite formidable as well due to the number of foundries it has and the high capital costs and barriers to entry in semiconductor manufacturing. For a more in-depth review if INTC, please see here. Both CSCO and INTC exhibit dominance and consistence in their respective fields. The dominance will provide consistent revenues and should afford ample room for future dividend hikes. I rate them as even again and will move on to the next criteria.

CSCO Free Cash Flow ChartClick to enlarge
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CSCO Free Cash Flow data by YCharts

CSCO Debt to Equity Ratio ChartClick to enlarge
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CSCO Debt to Equity Ratio data by YCharts

The next criteria that I will be using is debt and free cash flow. As we can see from the above 5-year charts, CSCO has a more consistent free cash flow whereas INTC has the lower debt-to-equity ratio. Both sets of ratios are quite low for the stable mature businesses, that is CSCO and INTC. I will rate them both as even and will move on to the next criteria.

INTC Return on Equity ChartClick to enlarge
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INTC Return on Equity data by YCharts

INTC Return on Equity ChartClick to enlarge
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INTC Return on Equity data by YCharts

The last criteria that I will be using is management. Warren Buffett was asked what was the key thing he looks for when investing in a company and he stated management (quote taken from "the Buffett Exception"). The area of management is where INTC distinguishes itself versus CSCO. INTC correctly realized that it was a maturing company and began to aggressively raise its dividend payout from 16 cents in 2004 to 78 cents in 2011, while shrinking its share count from 6,494 million to 5,411 million while aggressively spending to open new foundries. CSCO has also been able to aggressively repurchase stock since 2004 shrinking its share count from 7,057 million to 5,563 million at the end of 2011. Where it has fallen in my view is its return on assets and equity over the last four years have steadily eroded whereas INTC dipped due to the recession but has since come back strong. Prior to 2011, CSCO hasn't paid a dividend to shareholders which concerns me going forward. With the favorable tax treatment of dividends being in place for quite some time, CSCO's failure to return any cash to shareholders makes one wonder just how aggressively it will raise the dividend going forward. The company's pledge of returning 50% of free cash flow back to shareholders via dividend hikes and buybacks may skew heavily to buybacks and leave the dividend hike more miniscule. CSCO would still be fulfilling its pledge; however, as a shareholder until proven otherwise my choice is INTC.

In summary, if I would have to choose just one company my choice would be INTC. While both business models are stable and each company is dominant in their field, I feel INTC offers a better deal for dividend growth investors. I am currently long INTC and plan on remaining that way for the foreseeable future. Thank you for reading and I look forward to your comments.

Disclosure: I am long INTC. This article is for informational purposes only.