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Edited By Adam Isaac

Intel Corporation (INTC) is the leading chip manufacturer in the world. Thanks to strong earnings, the company has been a dividend dynamo. Intel pays a dividend of $.90 per share and a healthy dividend yield of 3.90%. Intel has been increasing the dividend payments on a consistent basis since it started paying dividends.

In the present day low yield environment, a lot of investors turn to dividend paying stocks. However, it is important to identify stocks which can sustain its current dividend levels or potentially increase them. In addition, it is also important to find stocks which can offer attractive dividends at a reasonable price. In my previous two articles, I explained why Intel is a cheap investment at the moment and how safe are its dividends. However, in this article, I go a little deeper and analyze its cash flows and debt based on some essential metrics, in order to determine the financial health of the company.

Free Cash Flows:

Free Cash Flows

2011

2010

2009

Net Income

$12,942

$11,464

$4,369

Depreciation

$5,141

$4,398

$4,744

Other noncash items

$923

$240

$308

Funds from Operations (FFO)

$19,006

$16,102

$9,421

change in noncash current assets

$526

$985

$365

change in noncash current liabilities

$465

$256

$328

Operating Cash flows

$18,015

$14,861

$8,728

Capital Expenditures

$10,764

$5,207

$4,515

Free Operating Cash Flow

$7,251

$9,654

$4,213

Source: SEC Filings

In the previous three years, the company has experienced an increase in its net income. Especially in 2010, the jump in net income was huge and the firm more than doubled its earnings. The same pattern is evident in funds from operations of the company, and the current amount stands at a stunning $19 billion. The cash flows from operations stood at significantly improved levels in 2011 as compared to 2009. The firm has been able to convert most of its sales into cash flows which indicates high quality of earnings.

In the end, Intel invests heavily in the capital expenditures. In the previous three years, the amount of capital expenditures has gone up massively. At the end of 2009, the firm spent just above $4.5 billion in capital expenditures. However, by the end of 2011, the capital expenditures for Intel have gone up to $10.7 billion. As a result, the free cash flows do not demonstrate the same magnitude of increase as operating cash flows. Also, the level of free operating cash flows is lower than 2010.

Debt:

Intel's long term debt stands at just over $7 billion, going up by $5 billion from the level of 2010. In the third quarter of 2011, the firm issued $5 billion worth of senior unsecured notes and used the proceeds to buy back common stocks. These notes carry between 1.95% and 4.80% interest rates and have maturity between 2016 and 2041. These long term debt figures do not include tax and other long term liabilities. In addition, the firm has $1.6 billion worth of convertible debentures issued in 2005 and further $2 billion in convertible debentures issued in 2009. However, these debentures represent $919 million and $1.05 billion in the total long term debt of the firm at the end of 2011.

Essential Ratios:

Essential Ratios

2011

2010

2009

Funds from Operations (FFO)/Total Debt

2.68

7.75

3.30

FFO/Capital spending requirements

1.77

3.09

2.09

Free Operating Cash Flow+ interest expense/ Interest expense

38.77

89.57

26.85

Debt Service coverage

38.77

36.70

26.85

For my analysis, I have used four ratios. First ratio indicates that the debt of the company is adequately covered with the FFO. This ratio has fallen significantly due to the issue of $5 billion worth of notes by the company in 2011. Nonetheless, the firm is generating enough cash flows to cover the long term debt.

The second metric indicates that one of the most important components of the firm is easily covered with the FFO of the company. As I mentioned, capital expenditures are an integral cash outflow for Intel, and the analysis shows that the firm is able to meet its capital spending requirements through its internally generated funds.

The last two metrics in the table indicate that the firm is able to meet its interest and debt payments sufficiently. Intel has issued long term debt at very favorable rates. As a result, the firm is able to cover the interest payments. Although, the debt levels for the firm have increased during the past year, my analysis indicates that the firm should not have any trouble meeting its debt and interest obligations.

Competitors:

Intel

AMD

Texas Instruments

P/E

9.90

N/A

21.30

P/B

2.40

2.50

3.00

P/S

2.30

0.50

2.60

EPS Growth

37.50%

N/A

9.30%

Operating Margin

31.20%

-4.60%

16.30%

Net Margin

22.70%

-9.90%

12.10%

ROE TTM

25.40%

-45.90%

14.60%

Debt to Equity

0.20

1.40

0.20

Source: Morningstar.com

The main competitor for Intel Corporation is Advanced Micro Devices Inc (AMD). Other than that, Texas Instruments, Inc. (TXN) is also a competitor of Intel. From the table above, it is clear that Intel beats its competitors on almost all the metrics. The firm has a very attractive P/E ratio and an impressive net margin of 22.70% along with impressive ROE of 25.40%. AMD has been sinking for the last five years, and its management needs to work hard to improve AMD's financial condition. Texas instruments looks fine, but its fundamental ratios are not as strong as Intel's ratios.

Summary:

Intel Corporation is the benchmark for chip manufacturing, and the firm has strong growth prospects. In the recent quarters, the firm has experienced less revenue growth due to the slowdown in the economy. However, the release of windows 8 will boost the PC and tablet sales. As a result, I expect Intel revenues to pick up soon. As my analysis shows, the firm is in a strong financial position, and I expect the firm to carry on its healthy dividend disbursements.

Source: Intel Offers Impressive Cash Flows