Thursday, June 11, 2009

INTC – Stock Analysis for Dividend Growth Portfolio

Intel Corporation (INTC) designs, manufactures, and sells integrated circuits for computing and communications industries worldwide. It offers microprocessor products used in desktops, workstations, servers, embedded products, communications products, notebooks, netbooks, mobile Internet devices, and consumer electronics. It also offers chipsets with embedded designs for industrial equipments, point-of-sale systems, panel PCs, automotive information/entertainment systems, and medical equipment.

INTC is not a dividend achiever. It has been paying growing dividends for last 5 years. I had shortlisted INTC for more analysis in my list of potential for dividend growth investments and opportunities for technology dividends. Keeping with that, my objective here is to analyze if INTC is a good dividend growth stock and how it will rate on my scale of risk-to-dividends.

Trend Analysis
Here I am looking at trends for past 8 years of corporation’s revenue and profitability. These parameters should show consistently growth trends. The trend charts and data summary are shown in images below.

  • Revenue: Consistently slow growing revenue since 2001. The average revenue growth for last 8 years is 3.5% (with 12.4% standard deviation). This indicating negative growth rates.
  • Cash Flows: In general, a range bound operating cash flow. The free cash flow is generally close to net income.
  • EPS from continuing operation: In general, a range bound EPS from continuing operations.
  • Dividends per share: Consistently growing dividends since 2003.

Risk Parameter Calculation
Here I use the corporation’s financial health to assign a risk number for measuring risk-to-dividends. The risk number for risk-to-dividends is 2.3. This is a medium risk category as per my 3-point risk scale. The increased payout factor and erratic EPS makes it a medium risk to dividends.

Quality of Dividends
This section measures the dividend growth rate, duration of growth, consistency over a period of past five years.

  • Dividend growth rate: The average dividend growth of 34.3% (stdev. 41.57%) is more than average EPS growth rate of 24.0% (stdev. 67.82%). Dividends have grown faster than earnings per share.
  • Duration of dividend growth: 5 years.
  • 4 year rolling dividend growth rate for past ten years: Less than 10% for past 8 years. More than 10% for last five years.
  • Payout factor: In the past 8 years, it has been in the range of 10% to 60%. Very wide range. It is now at 60%.
  • Dividend cash flow vs. income from MMA: Here, I analyze how the dividend cash flow stacks up against the income from FDIC insured money market account. The baseline assumption is (a) stock is yielding 3.5%; and (b) MMA yield is 3.4%. Last 8 years average dividend growth rate has been 34%. I do not expect INTC dividend growth rate at 34%. With my projected dividend growth of 3.5%, the dividend cash flow is equal to MMA income.

Fair Value Calculation
This section determines what price I should pay to buy a given stock
• Net present value (NPV) price based on 15 year DCF: $6.2
• Average high yield price calculated based on past 10 years: $23.8
• Pricing based on past 8 year relative price-to-earnings ratio. $23.6
• Pricing based on price-to-earnings ratio of 12: $9.3
• Graham number: $10.4

The range of fair value is calculated as $10.5 to $14.7. This is determined by taking average (for high value) of above five parameters and then subtracting it with half the standard deviation (for low value).

Qualitative Analysis
INTC continues to remain un-challenged leader in the computing microprocessor market segment. Its sole challenger, AMD keeps raring its head every once in a while. However, it has not seen any sustained challenge. On occasions this makes the company complacent and ignoring what the markets wants.

  • Like with any other technology company it is operates in a cyclical industry. Current recession seems to have had a significant impact.
  • The company seems to have entered into stagnation phase where it already has majority of market share. It banks of expansion of market for growth.
  • INTC is continuously searching for new growth areas with not much success so far.
  • Lately, it has two initiatives to go into newer market segments viz. the health care products by tying up with GE and the MIDI devices using its low cost ATOM family of products. Time will tell whether these two areas provide any growth to the company.
  • The growth in dividends in last five years seems to be the result of historically low payout factor. This dividend growth does not seem to be as a result of the growth in EPS.

I like INTC technological driven supremacy in its product segment. It has been raising dividends for last five years only. This growth seems be due to historically low payout factor instead of growth in EPS. The stock’s current risk-to-dividend rating is 2.3 (medium risk). I will continue to hold my existing INTC stock in my dividend portfolio. However, I will not be adding to my INTC position.

Full Disclosure: Long on INTC.

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