Intel: Why I Can't Own This Great Company

Summary

• In September I said that Intel could be the perfect tech recession stock.
• But the same element that stopped me from investing then is stopping me know: the dividend policy.
• Nonetheless, for those who aren't as concerned with dividends as I am, Intel is a market leading, undervalued, high quality stock, which will likely continue beating the market.

Written by Sam Kovacs

Introduction

In September last year, I wrote an article in which I claimed that Intel (NASDAQ:INTC) could be the perfect tech recession stock. I advised shareholders to hold on to their shares. Since then the stock has returned 10% while the S&P 500 has lost 5% of its value.

Source: Open Domain

And during all that time, I’ve been sitting on the sidelines, thinking what a shame it was that I could not own Intel. I started to feel FOMO, and needed to do something about it. I have a set process when I start feeling emotional about my decisions. When I feel FOMO, I walk away for a few days, then come back and look at the facts: Why did I decide not to purchase Intel? And has the situation changed?

In September I said that “the current combination of dividend yield and dividend growth potential isn't satisfactory for dividend investors”.

While Intel has been growing its dividend for decades, in the past few years it has been doing so at a rate which is not satisfactory given its extremely low yield. Management, while committed to their dividend, are not committed to increasing it aggressively. Intel’s payout ratios and revenue and net income growth would suggest that they have the ability to increase their dividend significantly, yet year in, year out, they choose not to do so.

Intel currently has a dividend yield of 2.2% & trades at $59.98. Based on our MAD Scores, INTC has a Dividend Strength score of 89 and a Stock Strength score of 96.

Intel is the type of company which I would love to own. The company made its way into my list of 24 superior large cap dividend stocks. But I cannot own Intel, because its dividend program doesn’t line up with my strategy. Intel with a 3-3.5% yield would make me excited. I’d even be interested by 2.2% yielding Intel, but with a management willing to grow the dividend by 10% per annum.

Unfortunately, both of these scenarios will likely not happen anytime soon, as Intel isn’t overpriced, and it is unlikely that management will change its approach to the dividend anytime soon.

Source: mad-dividends.com

I will walk you through Intel’s dividend profile to prove this point. I will then present the ratios used to derive our Value Score, Momentum Score, Quality Score which are combined into our Stock Strength Score.

Dividend Strength

Dividend strength is a concept which Robert & I coined which encapsulates the entirety of a stock’s dividend profile. This includes dividend safety, and the different elements which impact this (payout ratios, dividend longevity, interest coverage, management’s commitment to the dividend). But dividend strength goes beyond mere dividend safety. It also considers what we call dividend potential: the combination of dividend yield and dividend growth potential. All these metrics are linked into a quant metric, which we call the Dividend Strength score (you can read more about it here).

Dividend Safety

25% of Intel Corporation's earnings are paid out as dividends. This is a more attractive payout ratio than 73% of dividend stocks.

INTC pays 16% of its operating cashflow as a dividend, putting it ahead of 70% of dividend stocks.

Intel Corporation has a free cashflow payout ratio of 30%, a better ratio than 65% of dividend stocks.

	02/04/2016	01/04/2017	31/03/2018	30/03/2019	28/03/2020
Dividends	$0.9800	$1.0400	$1.1100	$1.2200	$1.2800
Net Income	$2.34	$2.31	$2.31	$4.42	$5.15
Payout Ratio	42%	46%	49%	28%	25%
Cash From Operations	$3.95	$4.59	$5.25	$6.27	$8.11
Payout Ratio	25%	23%	22%	20%	16%
Free Cash Flow	$2.54	$2.42	$2.52	$2.79	$4.29
Payout Ratio	39%	43%	44%	44%	30%

Click to enlarge

Source: mad-dividends.com

As you can see, in the past 5 years, while the dividend increased, payout ratios have been falling down. This is because management has been increasing the dividend at a rate which is much slower than the growth in earnings or cashflows.

This will be criticized in the next section. But as far as dividend safety goes, Intel is a role model. The company generates enough free cashflow to pay its dividend more than 3x over. It has been paying the dividend for decades. There is no chance that Intel’s dividend will be cut. It will be maintained, and likely grow somewhat, through thick and thin.

Dividend Potential

Intel Corporation's dividend yield of 2.2% is higher than 34% of dividend stocks. This yield is quite low, when we compare it to Intel’s dividend history which you can see in the chart below.

Source: mad-dividends.com

To put this in perspective, on 96% of the trading days in the past 10 years, Intel’s dividend yield was higher than it currently is. Over the last decade, the stock had a median yield of 3%.

This decrease in yield has happened as the price took off and the dividend failed to follow suit in the past 3 years.

This last year, the dividend grew only 4.8% which is low compared to their 5 year dividend CAGR of 7%.

Source: mad-dividends.com

I don’t understand why Intel wouldn’t increase its dividend more. Most likely, since the company has been doing so well, and the price has been increasing, management don’t believe it is necessary to return more capital to shareholders through dividends. They have decided to buyback significant amount of shares instead. Now I love buybacks, because they decrease the number of shares which need to receive a dividend, paving the way for dividend increases. But Intel isn’t going in that direction. The dividend is only being increased modestly.

This is a shame, because Intel can without doubt afford these increases. During the previous 3 years Intel Corporation has seen its revenues grow at a 8% CAGR and net income at a 26% CAGR.

Source: mad-dividends.com

Unfortunately, dividend potential is lackluster at the current yield of 2.2%.

Dividend Summary

The combination of the data presented above gives INTC a dividend strength score of 89 / 100. Everything is theoretically there for Intel to be a fantastic dividend stock, except one factor: management’s willingness to increase it at a healthy rate. This rate was ok when Intel yielded more than 3%, but those times are well behind us. Like we’ll see in the next section, Intel’s price is not overvalued, its dividend is merely underwhelming.

Stock Strength

The way I use the stock market is arguably quite different than many others. I merely view stocks as vehicles to generate growing income. Sure I capitalize on capital gains, but always with the end goal of increasing my dividends (you can learn more about this concept in my article “How to sell dividend stocks to increase your income”).

Because of this , assessing the likelihood of stock doing better than the market also has a very important place in my decision process. It comes second though. If a company meets our stringent dividend criteria, we then consider its Stock Strength. The way we approach it is by looking at the numbers. Theses numbers can be grouped into 3 factors: Value, Momentum & Quality.

Value tells us how objectively cheap the shares are relative to other stocks. Momentum gives us the crowd’s short term appreciation. Finally Quality gives us a good idea of the nature of the business. Who would want to own bad businesses?

These 3 factors are rolled up into one big number: the Stock Strength score, which assesses the likelihood of a stock doing better than the market. The perfect stock would have superior quality, be undervalued and picking up strong momentum relative to the market.

Value

• INTC has a P/E of 11.65x
• P/S of 3.35x
• P/CFO of 7.39x
• Dividend yield of 2.2%
• Buyback yield of 5.43%
• Shareholder yield of 7.62%.

These values would suggest that INTC is more undervalued than 80% of stocks, which is very encouraging. Intel looks cheap on all of these metrics. I even ask myself how it is possible that a company whose technology --as the CEO Bob Swan put it--“ runs 95% of the world’s Internet communication and government digital infrastructure”.

Source: mad-dividends.com

The chart above suggests that INTC is trading below its 5 year average PE. Intel looks surprisingly cheap based on any metric, although its valuation has always been somewhat low.

This clearly explains why I don’t think the price is too high, but the dividend is too low. Intel isn’t expensive. It is more undervalued than 80% of the stock market, despite being a super resilient stock!

Value Score: 80 / 100

Momentum

Intel Corporation' price has decreased -6.18% these last 3 months, but is still up 6.10% these last 6 months & 17.52% these last 12 months. The price now currently sits at $59.98.

Source: mad-dividends.com

INTC has better momentum than 81% of stocks, which is very encouraging. The stocks in the top 2 deciles for momentum are the market leaders. Stocks which the market has given the green light to. In the current environment, where everybody is scrambling to survive, Intel is still thriving, having posted its best quarter ever this year. The guidance is good for the second quarter. I believe Intel will continue to be resilient in the time coming.

Momentum score: 81 / 100

Quality

INTC's gearing ratio of 0.9 is better than 65% of stocks. Intel Corporation's liabilities have increased by 28% this last year. Operating cashflow can cover 48.1% of INTC's liabilities. Each dollar of INTC's assets generates $0.5 of revenue, putting it ahead of 48% of stocks. 17.2% of INTC's capital expenditure is depreciated each year, which is better than 4% of stocks. Intel Corporation’s Total Accruals to Assets ratio of -18.3% puts it ahead of 77% of stocks. The company also generates an impressive 29% return on equity. This makes INTC’s quality better than 73% of stocks.

Intel shines here as well, with a Quality score which places it extremely close to the top 25% of stocks in the US. The model penalizes high liability growth, but in Intel’s case, I believe we can all agree that it is not a problem. Liability coverage is so impressive, the company could repay all its liabilities with just two years of operating cashflow.

Quality Score: 73 / 100

Stock Strength Summary

When combining the different factors of the stocks profile, we get a stock strength score of 96 / 100 which is extremely positive. Intel leads in value, momentum and quality. The company is extremely well positioned to continue beating the market in upcoming months.

If I were running a capital appreciation mutual fund, there is no doubt I would buy Intel. But then again, I would have bought it long ago.

If you’re not as anal about dividends as I am, and are looking for a resilient stock in these trying times, Intel is a great pick.

Conclusion

With a dividend strength score of 89 & a stock strength of 96, Intel is a fantastic stock, which unfortunately I cannot own until I get confirmation that management is changing its approach to the dividend. This has not happened yet, and therefore I am forced to the sidelines. The other thing which could make me interested is a 30% drop which would bring the yield above 3%. I’m not counting on this though, I don’t see this as likely.

While I am saddened about my conclusion on Intel, I am using it as a good exercise to show discipline. This stock market doesn’t need anymore wishy washy investors who change strategy like they change shirts. I’m in it for the long run, and must honor the strategy which I know is sound and works best for me.

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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.