Thursday, September 27, 2012

Dividend Mantra's Recent Buy - Intel (INTC)

Well, Ben Bernanke, the Federal Reserve Chairman, recently announced the Fed is going to buy $40 billion worth of mortgage bonds per month until unemployment eases and the general economy improves. There is no definitive time frame for what is now QE3 (3rd round of Quantitative Easing), since the end of it will only come when the economy improves...and nobody knows when this will happen. The new "QE3: To Infinity and Beyond!" is designed to keep interest rates low, which is supposed to spur lending and improve hiring in the private sector. This may or may not actually help, and may actually lead to higher inflation down the road due to the printing of new money to pay for the bonds. Essentially, the Fed is swapping books with banks, exchanging money for debt.

I'm no economist. I'm just an everyday guy who works at a car dealership, trying to live well below my means and invest enough of my savings to live off of before 40 years old. I don't know what's going to happen, and although I think QE3 is a bad idea for a number of different reasons, I simply cannot predict the future. Because of this, I continue to do the only thing I know how to do: invest in high quality companies at attractive long-term prices.

The stock market certainly liked the news of QE3, most likely because of the liquidity it provides the economy and the profitability it may provide to U.S.-based firms due to a weakening dollar and their goods becoming cheaper to overseas markets. Over the last 5 days, the Dow Jones Industrial Average is up over 286 points, and over 2%. That's just in one week! But, as I always like to remind everyone: I don't invest in the market, as I'm not an index investor. I invest in individual companies, and I consider a company's valuation on a case-by-case basis.

As part of my Recent Buy series, I try to let my readers know of any equities I purchase soon after the transaction is completed. This is just one way I try to document my progress toward early retirement and financial independence.

I purchased 48 shares of Intel Corporation (INTC) on 9/18/12 for $23.22 per share. This is a company I already own a percentage of, and have a position in. This brings my total ownership of INTC to 170 shares. 

INTC is a bit of an enigma. It's been an extremely dominant player in the PC market over the last decade or so, as part of the "Wintel" team. It has forced competition like Advanced Micro Devices (AMD) into an afterthought. INTC has a huge R&D budget, which has allowed it to build extremely powerful chips and keep its large share of the PC market active even as technology rapidly changes.

However, it has been slow to adapt to the tablet/mobile platforms and the lower energy chips these devices require. INTC and its dominance in making high performance chips that consume energy has worked a bit against Intel here, but INTC has developed the new Atom microprocessor which consumes significantly less energy and is made for the mobile platforms that are becoming more popular. INTC is acutely aware that the tablet/mobile devices aren't going away, and there is tremendous growth ahead for this segment.

Investors in INTC may have been given a gift here. Because of Intel's slow move to mobile, the valuation has been compressed to significantly low levels. It's certainly a value play here, with a P/E ratio of 9.90. If you believe that INTC will eventually be a large player in the mobile/tablet space and that PC's aren't dead as some analysts claim, then INTC is a solid long-term value here. Although I don't want technology to have a large weighting in my portfolio, due to the ever-changing nature of the sector, I think INTC warrants attention at these levels. 

The entry yield on my purchase is 3.87%, which is very solid for a dominant multinational company. INTC has a 5-year dividend growth rate of 14.4%, with 9 years of consecutive dividend growth. This purchase will add $43.20 to my annual dividend total based on the current payout of $0.225 per share per quarter. 

Some analyst opinions on my recent purchase:

*Morningstar currently rates INTC as a 4/5 star valuation.
*S&P currently rates INTC as a 3/5 star Hold.

I'll update my Freedom Fund in early October to reflect my recent addition.

Full Disclosure: Long INTC

What are you buying?
Thanks for reading.

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