Wednesday, July 19, 2017

Adding INTC in 2017


This post is about adding an old stalwart to the 2017 Portfolio.  Intel, INTC, meets all my Dividend Machine criteria.  It is not a growth juggernaut like Nvidia.  However, it is a solid company.  While there are challenges in their space to be sure, as chip manufacturers are plentiful from Samsung to Advanced Micro Devices.  Yet for the income investor, Intel, is the preferred choice.


  • Chip manufacturers are challenging Intel’s dominance
  • Intel meets all Dividend Machine criteria
  • INTC is the best choice in this space for Income Investors


Without a doubt, Intel is not the only game in town anymore.  Samsung is on track to overtake Intel as the biggest chip maker by revenue, a position that Intel has held since 1991. Nvidia, symbol NVDA, is the growth juggernaut for chips used for artificial intelligence such as self driving cars.  Even google is getting in on the act of making chips.  

I am not a chip analyst, I am an income investor, but I do not think these competitors will put Intel out of business.  Intel is not perfect.  They have tried to expand into other types of chips and not been particularly savvy.  Yet, they have big boots and as you will see below, INTC is still a very good, solid company.

I have been writing about income investing for six years.  I use a simple strategy that I employ with great discipline.  I track my work and report on it in this blog regularly.   My strategy is not perfect, yet as compared with benchmark ETF’s that also concentrate on dividend stocks, my strategy wins.

INTEL DIVIDEND MACHINE FUNDAMENTALS:


In the first table, you can see the Dividend Machine bona fides of INTC followed by a discussion of the criteria.




Earnings per Share (EPS)

Intel fits my Dividend Machine strategy.    Earnings per share (EPS) are greater than dividends paid out.  Some people prefer to use free cash flow and I have no complaint about using that metric.  I start with EPS and if I think earnings need more analysis I move to free cash flow. According to Ycharts, INTC’s most recent quarterly free cash flow is $1.831 billion.   I looked back at my failed Dividend Machine picks and did not find that free cash flow was any better a predictor of that failure than EPS and I think EPS is easier for ordinary investors to find.


Dividend yield and growth

Dividend yield is 3.16% well above the 2.75% hurdle I am using for 2017.  Moreover, INTC’s dividend growth rate over the past 3 years is 7.04%.  I know my expenses will double in twenty years and I need my income to do the same.   If INTC continues their dividend growth history, income from INTC will double in 10 years.  

What if we have another major disruption in the stock market like we had in 2008/2009?   I was managing my money as well as that of other people during that time and it was rough.  Most of my clients, including me, could not afford to sell our holdings.  We needed the income from those investments and thank goodness, we did not.   INTC never stopped paying us.   They did not increase the dividend however.   They held their dividend steady between May 2008 until resuming dividend increases again in February 2010.   So, if history repeats, I hope that I again have the same discipline to hold good Dividend Machines.  


Debt to Equity Ratio (D/E)

The last criteria I use is a solid balance sheet.   You don’t want the stock you invest in to go belly up.  The measure for this criteria that I use is D/E ratio (debt to equity ratio.)   Generally speaking a D/E ratio of less than 1 is considered good.  In some industries, a D/E ratio of more than 1 is o.k. because they are very capital intensive, but INTC is not in that category.   Currently Intel’s D/E ratio is .3852 (source Ycharts.)  This is very respectable although it is above their annual average of about .20.   Intel has been adding debt and that can be a good thing provided it is not excessive.  They need to invest for the future and debt is cheap.   


Now that we have established that INTC fulfills all criteria to be considered a Dividend Machine, let’s look at why I think it is the best choice in this space for income investors.

INTC BEST PICK IN THE SPACE FOR INCOME INVESTORS:


Ease of buying the shares.   Samsung is an incredible competitor and their corporate reports suggest this will continue.  To buy Samsung you need access to the Korean stock exchange or the London or Luxembourg exchanges.  My broker is Schwab and they have a global desk that will get this done for you but the trades are very expensive and not nearly as liquid as a U.S. stock.

Income from dividends and calls

Absolute income is very important for we income investors.  For each dollar invested you get the best bang for the buck with INTC.  I looked at five stocks in this space: Broadcom (AVGO), Nvidia (NVDA), Texas Instruments (TXN), Applied Materials (AMAT), and Advanced Micro Devices (AMD) for comparisons.  In the table below you can see a comparison of dividend income and yield among these stocks.

 

The juicy $4.08 dividend delivered by Broadcom may be tempting, but it is important to note that Broadcom has negative earnings.  How long can they keep up that dividend?


Potential for covered call income.  This is icing on the cake for income investors.  If you don’t know how to sell covered calls, I would recommend you learn how.   Nvidia is a better stock for covered call income but INTC has some calls available.  A call for each of these companies is presented below and you can see that you can duplicate INTC’s dividend income with covered call income on NVDA.  However, if you are an income investor, you are probably a very conservative investor and INTC is a much safer bet than NVDA as far as consistent income is concerned.  With INTC, I don’t want to lose it to the call buyer and when I do sell calls, I never sell them on all my position. 

 


Performance in the face of formidable competition.  


As noted above, INTC has some serious competition.  Will this competition put Intel out of business?  I don’t think so.  My supporting evidence is revenues.  If the competition is cleaning INTC’s clock, you would see declines in revenue like you are seeing in retail where Amazon is cleaning their clocks.  But that is not the cast for Intel.  Look at the table below and you can see a steady improvement in revenues even in the face of increased competition.


 

SUMMARY:


Intel is a true Dividend Machine by every metric I use.  While competition is fierce and growing, INTC has the capacity to keep up. For each dollar you spend investing in this space, you will have more income and more income growth with Intel than any of the other stocks in the space.  For these reasons, I think INTC is the best stock in this space for income investors.

M* MoneyMadam
Disclosure:  Long INTC