Intel Corp (INTC) – A Dividend Stock to Own. I’m becoming a broken record. The market continues to set all-time highs with no significant pullback. In my opinion, the S&P 500 monthly chart is very much extended and should have a downturn. However, like all shopping centers across America, you can still find items on sale in the back of the store. Today’s post will talk about Intel Corp (INTC), which looks undervalued and presents a good buying opportunity in this overvalued market.

Overview of Intel

Intel Corp. (INTC) is an American multinational and technology company headquartered in Santa Clara, California, in Silicon Valley. It is the world’s largest semiconductor chip manufacturer by revenue and is the developer of the x86 series of microprocessors, the processors found in most personal computers (PCs) and servers. The Company produces other technology products such as microprocessors for a computer system manufactured by Lenovo, HP, and Dell. Intel also manufactures motherboard chipsets, network interface controllers and integrated circuits, flash memory, graphics chips, embedded processors, and other devices related to communications and computing. Total revenue was $77,867 million in 2020 and $77,615 million in the LTM.

Intel Dividend History, Growth, and Yield

Intel is up only 7.8% year to date. So, while most stocks have been only going up this year, Intel has lagged. However, I think it has room for upside potential. The Company is now dealing with a significant failure to its 10 nm process technology. The Company has been dealing with this issue, while Advanced Micro Devices, Inc. (AMD) capitalizes on Intel’s poor management and planning. However, this failure is what creates an opportunity for investors. 

We will now look at Intel’s dividend history, dividend growth, and dividend yield. We will then determine if it’s a good buy at the current price.

Intel has been growing its dividend for seven consecutive years making the stock a Dividend Challenger. However, in 2014, the Company froze its dividend. Before 2014, Intel raised its dividend for ten straight years. Thus, Intel has been a dividend-paying stock since 1992. 

In the last ten years, Intel has had an average dividend growth rate of ~7.68% CAGR  as seen in the chart below from Portfolio Insight*. I love it when companies grow their dividend higher than the rate of inflation, as this will provide me with buying power for years to come. Intel’s past 5-year dividend growth average is 6.58% CAGR, much lower than its ten-year average but still higher than the inflation rate. 

Source: Portfolio Insight*

So, the dividend growth rate has slowed down compared to its last 10-year average. This is concerning as a dividend growth investor. As dividend growth investors, we would like to see companies grow its dividend faster than inflation. As long as the dividend increase on average of 3.3% a year or higher, I am a happy dividend investor.

Also, this is a critical point about Intel’s dividend that I think is very significant. Intel continued to pay its dividend during the most challenging period in the last 100 years. Most businesses and industrials were cutting or suspending their dividend payments the previous year during the COVID-19 pandemic; Intel continued to pay out its dividend. The Company increased its dividend by 5% in January of this year. That is very impressive. That tells me everything I need to know about the focus of the dividend policy and dividend safety. 

INTC’s dividend yield is 2.59% as of this writing. This is a good starting yield for those dividend growth investors—especially those investors who are leaving the bond market looking for higher yields. Income-driven investors may want a 4.5% yield or higher. So, Intel does not meet those criteria, but the dividend growth does.

Intel’s current dividend yield is one basis point higher than its own 5-year average dividend yield of 2.55%. I like to look at this metric because it gives me a good idea if a company I am researching is undervalued or overvalued based on the current and 5-year average yield. Stock price and dividend yield correlate with one another. If the stock price goes higher, then the dividend yield goes lower. Vice versa as well.

Source: Portfolio Insight*

Is the dividend safe? We should always ask this question if we are looking for an undervalued dividend growth stock to invest in. Sometimes undervalued dividend stocks can present us with a “value trap,” and the stock price can continue to head lower.

This is why it is essential to look at the dividend payout based on earnings and free cash flow (FCF). Analysts predict that Intel will earn $4.78 per share for the Fiscal Year (FY)2021.  Analysts are pretty accurate when predicting Intel’s futures earnings. Intel’s annual dividend payment is $1.39 per share. Using the dividend payment gives us a payout ratio of ~29% based on earnings. Having a 29% dividend coverage with a dividend yield of over 2.56% is very safe. On a free cash flow basis, Intel has a dividend payout ratio of 51%. Thus, the dividend is well covered by both earnings and free cash flow. 

On another note, capital expenditures have been flat for the past few years. The Company spent $16,213 million in 2019 and spent $14,453 million last year. All while they were increasing free cash flow each year. Thus, no concern about the spending for Intel.

Intel is also refocusing its business into a new IDM 2.0 business model. This new model will help Intel focus to take control of the semiconductor development and production industry. One of the major initiatives under IDM 2.0 is to expand Intel’s global foundry capacity through “Intel Foundry Services” (“IFS”), to further growth by partnering with industry peers. You can read more about this new initiative in this article that goes more in-depth. 

Intel Revenue and Earnings Growth / Balance Sheet Strength

This section will look at how well Intel has grown earnings and revenue throughout the years. When evaluating a company, these two metrics are at the top of my list to consider. Without revenue growth, a company can’t have sustainable earnings growth and continue paying out a rising dividend.

For the past ten years, Intel has had revenue increasing at a Compound Annual Growth Rate (CAGR) of 4.15%. This is something to worry about as most technology companies continue to grow their revenue at a high rate. Net income has also increased during these ten years at a slightly faster pace of 5.5%.

Earnings, however, have seen a much better growth rate when compared to revenue and net income. Earnings per share have grown 9.3% CAGR annually for the past ten years. Over the past five-year, EPS has had a CAGR of 18.2%. So, the Company is growing earnings very well over the past few years but slowed down on the dividend growth. This tells me that the management team is being conservative with the dividend growth policy, which is a good thing, in my opinion. 

Last year’s EPS increased from $4.87 per share in 2019 to $5.30 per share for 2020, a modest increase of 9%. Considering the challenges in the year because of the COVID-19 pandemic, a flat year is pretty good for most companies. Also, analysts expect Intel to make $4.80 per share for the fiscal year 2021, which would be a (-9%) decrease compared to 2020. This is because of the mismanagement of the new microprocessors. 

Also, the Company has a solid balance sheet. Currently, Intel has an S&P credit rating of A+, which is investment grade. The Company has a debt-to-equity ratio of 0.4, which is very good in my book. And the interest coverage ratio of 36X, which is very good. Thus, the Company looks to be in an excellent position and will continue to cover the dividends.

Intel’s Valuation

One of the valuation metrics that I like to look for is the dividend yield compared to the past few years’ histories. I also want to look for a lower price-to-earnings (P/E) ratio based on the past 5-year or 10-year average. Furthermore, I like to use the Dividend Discount Model (DDM). I use a DDM analysis because a business is ultimately equal to the sum of the future cash flow that that business can provide. 

Let’s first look at the P/E ratio. Intel has a P/E ratio of 10.8X based on Fiscal Year (FY)2021 earnings of $4.80 per share. The P/E multiple is very low compared to the past 5-year P/E average of 14.4. If Intel were to vert back to a P/E of 14.4, we would obtain a price of $69.12 per share.

Now let’s look at the dividend yield. Like I mentioned, INTC’s dividend yield currently is 2.59%. Based on Intel’s own 5-year dividend yield average of 2.55%, there is a small potential upside. For example, if Intel were to return to its dividend yield 5-year average, the price target would be roughly $55.82.

The last item I like to look at to determine a fair price is the DDM analysis. I factored in a 10% discount rate and a long-term dividend growth rate of 7%. I use a 10% discount rate because of the low current dividend yield. The projected dividend growth rate is lower than its 10-year average but in line with its past 5-year average. This gives us a fair price target of $49.58 per share.

If we average the three fair price targets of $69.12, $55.82, and $49.58, we obtain a reasonable, fair price of $58.17 per share. This gives Intel a possible upside of 7.2% from the current price of $54.26.

Conclusion On Intel – A Dividend Stock to Own

Intel looks like a good buying opportunity with modest upside potential on a very safe dividend growth stock for the long term. There is a possibility that an investor will get a better entry point because the market is at all times high and needs a pullback. Intel’s stock price may be lower with a market pullback to give a dividend growth investor a better entry. However, Intel is something that all dividend growth investors should consider for their long-term portfolio at today’s price.