What Intel's Capital Allocation To Shareholders Is Telling Us About Intel's Long-Term Growth Prospects

| About: Intel Corporation (INTC)

Summary

Dividend has remained unchanged for 9 quarters / share repo's offsetting dilution.

Q1 '14 was a decent quarter for the microprocessor giant.

"Core" EPS for Intel may reach just $2.50 per share - the best it gets.

When Intel (NASDAQ:INTC) reported their calendar Q1 '14 financial results in mid-April 2014, I thought it was a decent quarter for the microprocessor giant, as Q1 '14 gross margin was better-than-expected, and I thought gross margin guidance for Q2 '14 at 61% (give or take the Intel guide factor) was better-than-expected as well.

Forward EPS estimates remained stable for Intel following the Q1 '14 report, as analysts are growing more confident that INTC can print $2 per share consistently.

Here is our spreadsheet history of the revisions for 2014, 2015, and 2016 EPS:

EPS growth - act and est. 12/31/2014 9/30/2014 6/30/2014 3/31/2014 12/31/2013 9/30/2013 6/30/2013 3/31/2013 12/31/2012 9/30/2012 6/30/2012 3/31/2012 12/31/2011
2016 eps gro - est n/a n/a n/a 5% 6%
2015 eps gro - estimated n/a n/a n/a 6% 8% 3% 3% -2% -3% -5%
2014 eps gro - estimated n/a n/a n/a 0% -2% 2% 5% 8% 8% 9% 8% 9% 10%
2013 eps gro - actual -11% -11% -11% -11% -11% -11% -12% -12% -9% -6% 7% 8% 8%
2012 eps gro - actual -11% -11% -11% -11% -11% -11% -11% -11% -11% -11% 0% 4% 1%
2011 eps gro - actual 17% 17% 17% 17% 17% 17% 17% 17% 17% 17% 17% 17% 17%
2010 eps gro - actual 166% 166% 166% 166% 166% 166% 166% 166% 166% 166% 166% 166% 166%
2009 eps gro - actual -23% -23% -23% -23% -23% -23% -23% -23% -23% -23% -23% -23% -23%
2008 eps gro - actual -17% -17% -17% -17% -17% -17% -17% -17% -17% -17% -17% -17% -17%
2007 eps gro - actual 40% 40% 40% 40% 40% 40% 40% 40% 40% 40% 40% 40% 40%
2006 eps gro - actual -39% -39% -39% -39% -39% -39% -39% -39% -39% -39% -39% -39% -39%
2005 eps gro - actual 19% 19% 19% 19% 19% 19% 19% 19% 19% 19% 19% 19% 19%
2004 eps gro - actual 39% 39% 39% 39% 39% 39% 39% 39% 39% 39% 39% 39% 39%
2003 eps gro - actual 67% 67% 67% 67% 67% 67% 67% 67% 67% 67% 67% 67% 67%
2002 eps gro - actual -2% -2% -2% -2% -2% -2% -2% -2% -2% -2% -2% -2% -2%
2001 eps gro - actual -68% -68% -68% -68% -68% -68% -68% -68% -68% -68% -68% -68% -68%
2000 eps gro - actual 41% 41% 41% 41% 41% 41% 41% 41% 41% 41% 41% 41% 41%
1999 eps gro - actual 31% 31% 31% 31% 31% 31% 31% 31% 31% 31% 31% 31% 31%
1998 eps gro - actual -8% -8% -8% -8% -8% -8% -8% -8% -8% -8% -8% -8% -8%
1997 eps gro - actual 33% 33% 33% 33% 33% 33% 33% 33% 33% 33% 33% 33% 33%
1996 eps gro - actual 49% 49% 49% 49% 49% 49% 49% 49% 49% 49% 49% 49% 49%
1995 eps gro - actual 32% 32% 32% 32% 32% 32% 32% 32% 32% 32% 32% 32% 32%
1994 eps gro - actual 16% 16% 16% 16% 16% 16% 16% 16% 16% 16% 16% 16% 16%
1993 eps gro - actual 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
1992 eps gro - actual 33% 33% 33% 33% 33% 33% 33% 33% 33% 33% 33% 33% 33%
1991 eps gro - actual 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20%
2016 eps estimate n/a n/a n/a $2.10 $2.10
n/a n/a n/a $0.64
n/a n/a n/a $0.59
n/a n/a n/a $0.49
n/a n/a n/a $0.49
n/a n/a n/a 9 8
2015 eps estimate n/a n/a n/a $2.00 $1.99 $1.98 $2.03 $1.98 $2.02 $2.08
n/a n/a n/a $0.57 $0.58 $0.60 $0.61 $0.63
n/a n/a n/a $0.54 $0.54 $0.55 $0.56 $0.56
n/a n/a n/a $0.47 $0.46 $0.46 $0.48 $0.45
n/a n/a n/a $0.44 $0.44 $0.45 $0.49 $0.48
n/a n/a n/a 41 38 17 11 9 7 2
2014 eps estimate n/a n/a n/a $1.89 $1.85 $1.92 $1.97 $2.02 $2.09 $2.19 $2.76 $2.91 $2.86
n/a n/a n/a $0.54 $0.55 $0.54 $0.57 $0.59 $0.61 $0.66 $0.84
n/a n/a n/a $0.51 $0.51 $0.51 $0.52 $0.53 $0.55 $0.60 $0.75
n/a n/a n/a $0.46 $0.43 $0.44 $0.45 $0.46 $0.47 $0.54 $0.63
Q1 '14 eps - actual $0.38 $0.38 $0.38 $0.38 $0.37 $0.43 $0.44 $0.46 $0.47 $0.52 $0.65
41 41 41 41 42 45 46 45 38 16 10 8 7

* Source internal spreadsheet

Since Q4 '11, the 2014 consensus EPS estimate has been slashed almost 35%, $2.86 as of Q4 '11 to the 2014 current estimate as of mid April '14 of $1.89.

Note the stability in the 2015 estimate: Over the last 7 quarters, the reduction from $2.08 to $2.00 is an approximate 3.8% decline, so the analyst community is growing more confident in that current 2015 consensus.

However, the interesting insight to Intel's capital-intensive business model comes from watching what the board of directors has done with the dividend and share repurchases.

INTC's dividend has remained unchanged at $0.2250 for 9 consecutive quarters.

est est est 3/31/2014 12/31/2013 9/30/2013 6/30/2013 3/31/2013 12/31/2012 9/30/2012 6/30/2012 3/31/2012 12/31/2011 9/30/2011 6/30/2011 3/31/2011
Dividend per share $0.2250 $0.2250 $0.2250 $0.2250 $0.2250 $0.2250 $0.2250 $0.2250 $0.2250 $0.2250 $0.2250 $0.2100 $0.2100 $0.2100 $0.1812 $0.1812
4q trailing dividend $0.90 $0.90 $0.90 $0.90 $0.90 $0.90 $0.90 $0.90 $0.89 $0.87 $0.86 $0.81 $0.78 $0.73 $0.68 $0.65
y/y growth 0.0% 0.0% 0.0% 0.0% 1.7% 3.4% 5.3% 10.9% 13.1% 19.2% 26.2% 24.1% 24.2% 19.2% 13.8% 13.2%
Dividend yield n/a n/a n/a 3.33% 3.40% 3.91% 4.09% 3.75% 4.21% 4.14% 3.35% 2.90% 3.13% 3.04% 3.01% 3.19%
Pay-out ratio 42% 44% 49% 59% 39% 37% 58% 56% 47% 39% 39% 38% 31% 32% 31% 32%

* Source: internal spreadsheet

I've always felt the dividend actions by a board of directors are a huge "peek" into the longer-term growth prospects for a company, without management teams and a board of directors actually saying anything, and communicates a lot more information than you might think.

As growth stocks start to mature and secular growth prospects wane, companies begin to pay dividends since there is less need to fund future growth and there is less need to retain cash in the business.

With Intel specifically, the EPS and cash-flow growth has been stagnant so the Intel Board has had to stop increasing the dividend since EPS has peaked and funds are needed for share repurchases.

Here is another interesting aspect to Intel's capital allocation story: Fully diluted shares outstanding has stopped declining despite the fact that Intel spent $4 billion in free-cash-flow to repurchase shares during the quarters highlighted.

3/31/2014 12/31/2013 9/30/2013 6/30/2013 3/31/2013 12/31/2012
$12,764 $13,834 $13,483 $12,811 $12,580 $13,477
$5,138 $5,263 $5,069 $5,341 $5,514 $5,660
$2,846 $2,826 $2,742 $2,516 $2,527 $2,629
$2,037 $2,006 $2,168 $2,165 $1,947 $1,958
$4,883 $5,022 $4,910 $4,681 $4,547 $4,662
$2,533 $3,549 $3,504 $2,719 $2,519 $3,155
$48 $34 $452 $11 ($26) $60
$122 ($32) ($32) ($37) ($50) ($11)
$2,693 $3,551 $3,924 $2,693 $2,443 $3,204
$746 $888 $974 $693 $398 $736
$1,947 $2,663 $3,093 $2,000 $2,045 $2,468
5,117 5,103 5,100 5,106 5,080 5,095
$0.38 $0.57 $0.61 $0.39 $0.40 $0.48
$0.37 $0.52 $0.54 $0.39 $0.41 $0.45
3% 10% 13% 0% -2% 7%

* Source: internal spreadsheet

Part of the challenge with Intel's capital-intensive business model is that while the giant generates quite a bit of free-cash-flow, almost half goes for capex, which this article details from late 2013.

Without revenue growth, INTC is challenged today to fund the capex, and fund the dividend to give patient investors a reason to hang around, and to generate enough free-cash-flow after the dividend to offset dilution from stock option exercises and share sales.

Buying back $4 billion in stock and having your fully-diluted share count increase is not a long-term recipe for success.

With Q2 '14's results in mid-July, we will be watching the consensus 2015 and 2016 EPS estimates to see that they remain stable, and looking for some revenue growth down the road.

Intel is like Sisyphus: The capex constraint is meaningful and punishing.

We are going to stay with the stock for now, but when I wrote this article in September 2012, I asked the right question, but found the wrong answer.

The stock may never trade much over the low $30s and peak earnings for INTC for the last 25 years was 2011's $2.39 per share.

It took me a while to think through the capital-intensity, the return of capital math, and what it all means for the stock.

This may be one reason new CEO Brian Krzanich thought INTC should do more 3rd party contract manufacturing: The company has the technical edge and the low-cost production leadership, which are huge competitive advantages; they are just in dying markets like PCs, etc.

If you read our progression of articles on INTC since late 2012, we are growing progressively more frustrated with the stock.

We are long a 1.8% position in the stock spread through a lot of account. We are going to give it more time and see what the next few quarters hold for the company.

Disclosure: I am long INTC. 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.

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