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Intel: 2 Reasons For Optimism

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About: Intel Corporation (INTC)
by: The Dividend Bro
The Dividend Bro
Long only, portfolio strategy, dividend investing, dividend growth investing
Summary

Intel reported third quarter results recently that produced record growth for its data-centric businesses.

The company also announced it was adding an additional $20 billion to its share repurchase authorization.

Intel has been paying a dividend longer than several other large cap tech names.

Strong performance from the Data Center Group and shareholders returns should make Intel a very appealing stock to investors.

Intel Corporation (INTC) reported earnings results near the end of October, and shares gapped up nearly 8% following the announcement. Moves of this magnitude don’t happen often for companies with market capitalization of $246 billion.

While some might shy away from a name that moved this fast in a short period of time, I believe that there are two reasons investors can still consider buying Intel even at the current price.

Reason #1: Record Revenue and a Return to Growth for the Data-Centric Business

Intel released third quarter results on 10/24/2019.

Source: Intel Corporation’s Third Quarter Earnings Presentation, slide 5.

Revenue reached a quarterly record $19.2 billion, which was a massive beat of consensus estimates by $1.1 billion. Earnings-per-share was $1.35 for the quarter, which was $0.19 above estimates, but a 2.2% drop from the prior year.

Intel’s Client Computing segment had shown strong growth rates over the past few years, but revenues were down 5% from the previous year. This segment was up against strong comparable figures. Client Computing had revenue growth of 15% and marked a company record in the third quarter of 2018. This growth was due to strong sales for commercial and gaming products.

Much of the decline in the most recent quarter was due to inventory levels that were not able to keep up with demand, especially at lower price points. Intel expects that PC supply in the second half of 2019 will be up double-digits from the first half of the year. Operating margins for this segment came in at 36%, 1% better than the company’s guidance.

Intel’s data-centric businesses combined to increase 6% to a record $9.4 billion. In fact, all of Intel’s businesses within this group produced record quarterly revenues. This reverses the declines that the company had seen in this group of businesses in each of the last two quarters. On a sequential basis, these segments were up a combined 24%.

Data Center Group was up 4% year-over-year and 28% sequentially. This division was able to overcome a 6% decline in platform unit volumes by realizing an average selling price increase of 9%. Much of this increase came from high demand for Intel’s second-generation Xeon Scalable products.

The other data-centric businesses were up a combined 13% for the quarter. The Internet of Things Group increased 9% even as pricing declined due to lower margin product mix. Still, IoTG crossed the $1 billion threshold for the first time due to growth in retail and transportation.

Mobileye improved 20% due to higher adoption rates for the Advanced Driver Assist Systems. The Programmable Solution Group grew 19% as Intel’s NAND and Optane product saw improved growth, which more than off set lower average selling prices. Memory sales improved 2% due to demand for wireless and 5G products, though Cloud and Enterprise sales were weaker during the quarter. Intel also expects to complete its $1 billion divestiture of its 5G smartphone modem segment to Apple (AAPL) sometime in the fourth quarter.

The company updated guidance for the fourth quarter and full year. Intel expects $19.2 billion in revenue for the fourth quarter and earnings-per-share of $1.24. Both figures were ahead of analysts’ estimates. Full year guidance was also revised. The company expects revenue of $71 billion and a midpoint for earnings-per-share of $4.60 for the year, up from $4.40 previously.

Based of the most recent closing price of $56.51 and updated guidance, Intel has a price-to-earnings ratio of 12.3, which is slightly below the stock’s 10-year average price-to-earnings ratio of 12.6 according to Value Line.

Intel’s second quarter was a return to growth for its data-centric group. This growth wasn’t carried by a single segment, but by each individual business. Each business posted a new record for revenue and was the main reason the stock was up 8% following the release of earnings results.

These strong results show that Intel’s data-centric business is once again firing on all cylinders, which makes me extremely positive on the company.

Reason #2: $27+ Billion Buyback and Dividend Growth

The second reason I find Intel an attractive investment is its ability to produce cash flow. Intel has used both share repurchases and dividends to return a large amount of capital to shareholders over the years.

Intel accelerated its share repurchase in the third quarter, buying back 92 million shares at an average price of just under $49 for a total buyback of $4.5 billion in the quarter. Considering the current share price, it appears that the company’s buyback was well-used at least in the short term.

Year-to-date, Intel has retired $10.2 billion of its own stock. This amount should surprise those that follow the company as Intel has been a serial repurchase of its own tock for quite some time. The company has reduced its share count by an annual rate of 2% per year since 2009, retiring more than a billion shares during this period.

In addition, Intel added $20 billion to its repurchase authorization, bringing the total buyback authorization to $27.2 billion. This total represents more than 11% of the company’s current market capitalization.

In addition to buybacks, Intel has returned capital to shareholders through its dividend, something the company has done longer than many other large cap tech names. The company has a current dividend growth streak of five years, but that is because dividend growth was paused in 2014. Intel had 10 years of dividend growth prior to this freeze.

The company has been committed to paying a dividend longer than several large cap tech names, like Apple, which restarted its dividend in 2012, and Cisco Systems (CSCO), which began paying a dividend in 2011.

Intel has increased its dividend by:

  • An average rate of 7.7% per year over the last three years.
  • An average rate of 5.9% per year over the past five years.
  • An average rate of 8.2% per year over the past 10 years.

Intel raised its dividend by 5% for the 3/1/2019 payment. Using the annualized dividend of $1.26 and expected earnings-per-share of $4.60 for the year, Intel has a payout ratio of just 27%. This compares very favorably to the company’s five and 10-year average payout ratios of 35% and 40%, respectively.

The company’s free cash flow payout ratio is also on the low side. In the third quarter, Intel paid out $1.4 billion of dividends while producing $6 billion of free cash flow. This equates to a free cash flow payout ratio of 23%.

Over a longer period of time, the company’s free cash flow payout ratio is slightly higher, but still very safe. Intel has paid out $4.2 billion of dividends so far in 2019. Over the same period of time, the company has generated $11.7 billion of free cash flow, for a payout ratio of 36%.

Despite the increase in dividend, Intel actually paid out less in dividends in Q3 than it did in either of the first two quarters of 2019 due to a reduction in share count over this period of time.

It should be noted that the current yield of 2.2% is well below the five-year average yield of 3.2%, but above the 1.9% average yield of the S&P 500.

Final Thoughts

Intel’s third quarter result showed very impressive growth in the company’s data-centric segment. Each of the businesses within this segment produced a record for revenue. PC-centric revenues were down year-over-year, but faced tough comparisons from the previous year. Part of the reason for declines in this group was a lack of supply, something that should improve through year’s end.

Intel’s business has managed to produce a significant amount of free cash flow over the years, which has allowed the company to buyback more than a billion shares over the last decade. And except for 2014, Intel has raised its dividend every year since 2004.

The combination of a business that is producing record setting growth in its most important segment and significant capital returns to shareholders makes me bullish on Intel as an investment.

Disclosure: I am/we are long AAPL, 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.