Intel In The Garden Portfolio

Summary

• I take a closer look at Intel in terms of my Garden Portfolio.
• The dividend yield and growth are essential metrics for me.
• Using other data, I've developed a reasonable trajectory for future dividend payments.

As I've written about, most recently in Tending the Dividend Garden – June Update, I like to group my stocks into several categories that I relate to crops from my garden. I believe this is an apt analogy because investing and gardening both require similar traits like planning and patience. My groups are defined solely by a stock's dividend yield and dividend growth rate (DGR). The examples of my crop categories are Microsoft (MSFT) for apple tree, Target (TGT) for strawberry, Johnson & Johnson (JNJ) for green bean, AT&T (T) for watermelon, and Realty Income (O) for spinach. These two metrics are by no means the only criteria I measure a stock by when performing my due diligence, but organizing my stocks based on their dividends helps to keep me balanced between the high-yielding, low DGR stocks and the low-yielding, high DGR stocks. In this article, I will explore the dividend of Intel (NASDAQ:INTC) a bit deeper and evaluate valuation in terms of the dividend. I’ll also analyze future prospects and explain why I believe dividend growth will continue in the high single digits over the next several years, even as earnings concerns arise.

INTC is what I call a green bean stock in my Garden Portfolio. When I plant green beans in my garden, I know I can expect moderate harvests on a consistent basis. They are the most reliable crop I grow, even if they never exceed my expectations. For this reason, I label an investment a green bean with a yield between 2.5% and 4% with 1 to 10 year DGRs ranging from 5% to 10%. INTC has a current yield of 3.13%. Due to a dividend freeze from 2013 to 2014, INTC is not a member of David Fish’s CCC list. As an owner of the stock, that freeze put INTC into an odd position in my portfolio. By not cutting its dividend, it didn’t warrant an automatic sell, but it did have one foot out the door. So far it has remained there even as increases did resume in 2015.

INTC has DGRs of 6.1% 1 year, 4.9% 3 year, 5.0% 5 year, and 10.1% 10 year. I like to compare these DGRs to get a sense of ongoing slowdowns or accelerations in the DGR. The ratio of the 5/10 year DGR is 0.50, meaning the dividend growth of the last 5 years is only 50% of the 10 year average growth. The freeze in 2014 is at least partly to blame for that as it also is for the lower 3 year DGR. The 1 year DGR can’t be viewed as a new trend, but a 1/10 year DGR of 0.60 is at least a step in the right direction towards more robust dividend growth.

The first value I compare to a historic average is the dividend yield. The aforementioned current yield of 3.25% is just the tiniest bit higher than the 5 year average yield of 3.24%. By this metric, INTC appears just about perfectly valued. An increase in share price of less than 20 cents would be enough to bring the yield down to its average which could easily be accomplished within a day.

Because each company treats their dividend differently, the second historic average I look at is the payout ratio. I like to compare the current payout ratio to the 10-year average payout ratio for a sense of the company’s behavior regarding this metric. INTC has a current payout ratio of 43% which compares favorably to the 10-year average payout ratio of 45%. This would allow the dividend to grow in line with earnings, or perhaps a bit faster if the payout ratio were permitted to climb to its recent average.

I love growing dividends but without earnings growth, they won’t exist. INTC’s EPS growth over the last 5 years was actually a contraction of 0.4%, which was clearly not enough to keep up with the 5 year DGR of 5.0%, and yet the payout ratio remains below its 10 year average. EPS growth can occur through a variety of ways, but the simplest is increasing revenue. An anticipated total revenue of $60.1 billion for the year 2017 is expected to grow to $61.8 billion and then $64.1 billion by the ends of 2018 and 2019, respectively. That’s a 2.8% increase from 2017 to 2018 followed by a 3.7% increase from 2018 to 2019. The EPS is projected to follow revenue higher, but at a faster pace due to share repurchases and higher net income. Estimates for the end of 2017 are $2.88, that rises 4.8% to $3.20 by the end of 2018, which rises 8.6% to $3.28 by December 2019.

Another metric I’ll check before I estimate any future dividend payments is the debt to equity ratio. INTC has a D/E of 0.39, implying debt will not be a hindrance to the dividend for the foreseeable future. For my purposes, a low D/E only tells me debt levels aren't at a point to hamper dividend growth. On the other hand, a high D/E could hold back future DGRs as the company looks to bring it down. For INTC, this metric won't exactly be fueling dividend growth, but it won't slow it down either.

Therefore, my projections will be based on a DGR of 7% over the coming 5 years. That yields a total $6.31 per share for a 5-year payback of 18.4%. Because I’m still in the accumulating phase, I always reinvest my dividends and in the case of INTC, every 6 shares I currently hold will generate a “bonus” share by July 2022.

Despite the frozen dividend, I continue to hold INTC. Based on this analysis, I believe the dividend is in fairly good shape as revenues should continue to rise. My concern is the possibility for stagnating or, worse yet, falling revenues due to increased competition. I know there have been rumblings from AMD’s (AMD) new chip release and technology is an incredibly dynamic sector. The worrisome part is not that AMD will unseat INTC anytime soon. I’m more fearful that any gains AMD makes will come right out of INTC’s earnings and have a massive impact on the stock and eventually, its dividend. However, INTC is not exactly standing still as it has entered the autonomous driving industry with its Mobileye purchase. It’s also becoming leaner as it ditched several IoT products and focusing on more profitable endeavors. For now, I plan to hold my entire position while monitoring the situation as closely as I can. Thanks for reading.

(Sources: YCharts, GuruFocus, DRiP Investing Resource Center)

Analyst’s Disclosure: I am/we are long T, TGT, JNJ, MSFT, O, 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.