Why Intel Belongs in Any Serious Investor's Portfolio

Includes: AMDD, INTC, MSFT
by: Tim Ayles

As an investment manager who has a slightly unhealthy obsession with dividends, I am surprised this year has had me desiring to own big cap tech stocks. Historically, big cap tech was where you went for safe, potential growth. To talk about owning companies like Microsoft (NASDAQ:MSFT) because of their dividends didn't seem the natural way to get paid for investing and becoming an owner in a company through public stock.

I will now tackle another surprising name. This is a name everyone knows and most likely everyone uses. If you are reading this article, there is a greater than 80% chance that you are using this companies product.

The company is Intel (NASDAQ:INTC). Intel has 80% of the microprocessor market and their products can be found in everything from computers and cell phones to garage door openers. Intel will spend more on the lifeblood of a good technology firm - research and development - than all of its competitors will make in profits. That stat alone means, barring a lucky break of a destructive new technology to the computer chip, Intel will continue to dominate the world for computer chips.

Now let's take a look at the buisness itself. The company just announced a near 15% pay raise for the owners of the business through a higher dividend. Coming into Friday's trading, the company was sporting a healthy 3% dividend yield. Starting Friday, that yield just rose to 3.45% roughly. Not only is this yield higher than the 10 years treasury bond that I make a requirement for a stock, but is darn near close to paying what a 30-year bond would pay. Some might make the argument that Intel has a better credit rating over the next 30 years, tongue-in-cheek.

It's not just the dividend that makes Intel a must-own company for all serious investors. When we open up and look under the hood of the company, we see that it continues to put together record profits in the face of a tough economy. Currently sporting a $120 billion market cap, with only $2 billion in long term debt and $14 billion in cash and cash equivalents, Intel could pay off their debt, and have 10% of the companies value in cash alone. Let's pretend they use that $12 billion of remaining cash and buy 10% of the company in an attempt to take it private. The remaining enterprise value of the company would be around $108 billion. In our pretend story, as I like to do when evaluating the relative safety of an investment, Intel then goes to the bond market and borrows $108 billion at a 6% interest rate in order to buy the rest of itself. The yearly interest on their new loan will run around $6.48 billion dollars. Looking at the last 4 quarters on Yahoo Finance shows that Intel earned over $10 billion in free cash flow. This is cash that, after spending money on running the business, can be used for dividends or growth. Once we strip out the $6.5 billion in interest costs, we are left with a tidy little sum of $3.5 billion per year. Intel can basically buy itself, and probably should. But good luck finding $108 billion to do that. As with Microsoft though, if it makes financial sense that they could buy themselves, maybe you too should consider buying them instead. Intel has a much safer moat than Microsoft in that destructive and replacement technologies to their business model are not nearly as prevalent.

I would prefer they just pay all the free cash flow in the form of dividends so I could get a 6% yield along with growth from a stodgy old tech company that no one thinks is sexy anymore.

When I look at Intel's competition, the first company that pops up, AMD Micro Devices (NASDAQ:AMD), makes me chuckle. AMD's best chance for making money is to continue suing Intel and hoping to win. In 2009, after they won a lawsuit, AMD wrote this in their shareholder report:

"Our debt and capital lease obligations as of December 26, 2009 were $4.7 billion … We cannot assure you that we will be able to generate sufficient cash flow or that we will be able to borrow funds in amounts sufficient to enable us to service our debt or to meet our working capital requirements ... We cannot assure you that we will be able to refinance our debt, sell assets or equity or borrow more funds on terms acceptable to us, if at all."

Like swatting an annoying fly off your meal, Intel isn't too worried about the little parasite trying to get a free lunch.

If you are looking to add Intel to your portfolio, you may want to wait until after next week due to a certain pattern in the market that is setting up to be eerily similar to the pre Flash-Crash days. You may get a better price based on market technicals. Otherwise, if you consider yourself a true investor, you need to put Intel in your portfolio.

Disclosure: Long INTC, MSFT