Valuation And Dividend Safety Analysis: Intel (INTC)

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Intel Corporation (NASDAQ:INTC) is a leader in designing and fabricating microchips for different applications. Intel was far and away the leading chip company for many years, dominating sales for PCs and servers. Additionally, the COVID-19 pandemic has benefitted the top and bottom lines. However, Intel is facing challenges with smartphone chips and more competition. However, Intel has a new CEO, and he is undoing some of the questionable recent acquisitions.

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Furthermore, the company is spending $100 billion on new fabs. Intel is a Dividend Challenger with seven years of dividend growth. The stock is yielding about 2.6% and trading at a reasonable valuation. I view Intel as a long-term buy.

Overview of Intel

Intel is the global leader in microprocessors and microchips. The company's focus is designing and fabricating microprocessors for PCs and servers. Intel's microprocessors are found in retail and business PCs and data center servers. Intel also has products outside of these two core markets. The company developed 3D NAND and 3D Xpoint products. The 3D NAND business was divested to SK Hynix for $9 billion. Intel sold its 5G Modem business to Apple (APPL). In addition, Intel has been actively expanding by acquisition. The company acquired Altera in 2015 for FPGAs, Nervana, and Movidius in 2016 for AI chips, Mobileye in 2017 for automotive vision chips, and Habana Labs in 2019 for AI chips. Intel recently announced it was divesting Mobileye in an IPO. Total revenue was $77,867 million in 2020 and $78,474 in LTM. Intel has a market capitalization of ~$209.45 billion.

Selected Data for Intel (NASDAQ)

Ticker INTC
Market Cap $209.45 billion
Stock Price $53.38
Dividend (FWD) $1.39
Dividend Yield 2.61%
P/E Ratio (FWD) 10.1

Source: Data from Seeking Alpha (as of January 4, 2022)

Intel Dividend and Dividend Safety

Intel is a dividend growth stock that has raised the dividend for seven consecutive years, making the company a Dividend Challenger. Intel has paid a dividend going back to 1992. The current forward dividend rate is $1.39 per share, and the stock is yielding approximately 2.61% as of this writing. This dividend yield is more than the 5-year average of about 2.54%, and it is more than double the average of the S&P 500 Index.

The company last announced a quarterly dividend increase of 5.3% to $0.3475 per share from $0.31 per share on January 21, 2021. Investors should expect another dividend increase in this quarter. Intel’s dividend growth rates are roughly 6.0% in the trailing 5-years and 5.9% in the past decade. According to the Chowder Rule, this gives a Chowder Number (CDN) of 8.67%.

In addition, Intel has excellent dividend safety marks from the context of earnings, free cash flow (FCF), and the balance sheet.

From an earnings perspective, the dividend was safe in the year 2021. The payout ratio was approximately 25% based on an annual dividend of $1.30 per share and non-GAAP earnings per share of $5.28. The company has yet to increase the dividend for 2022, but assuming a 6% dividend growth rate, the payout ratio will remain low even after assuming the bottom-line declines in 2022. My target value for payout ratio is 65% suggesting the dividend is very safe

The dividend is also very safe from the viewpoint of free cash flow. In the LTM, free cash flow was about $17,326 million. The dividend required $5,584 million, giving a dividend-to-FCF ratio of roughly 32%. This percentage is well below my threshold percentage of 32%, indicating a safe dividend.

Intel has a conservative balance sheet. At the end of Q3 2021, the company had ~$34,635 million in cash, cash equivalents, short-term investments, and trading securities. There is no short-term debt, current long-term debt is $4,694 million, and long-term debt is $35,610 million. Debt is not a risk for the dividend with the leverage ratio at 0.11X and interest coverage more than 36X.

Competitive Advantage, Risks, and Valuation for Williams-Sonoma

Intel’s advantages include market dominance in chips for PCs and data center servers. The company’s advantage extends to its internal design and manufacturing process. This point gives Intel scale and cost efficiencies few other chip manufacturers can match. Many other chip designers lack fabrication facilities and outsource to companies like Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM), Samsung Electronics, and Globalfoundries Inc (NASDAQ:GFS). Intel's scale and cash flow permit it to invest in fabs when other companies cannot. Lastly, Intel's balance sheet is conservative, giving it flexibility for acquisitions and capital expenditures.

However, Intel is in an increasingly competitive industry. The smartphone weakened Intel's hold on microprocessors and chips. Other companies such as ARM and Qualcomm, Inc. (NASDAQ:QCOM) lead in cell phone and modem chips. In addition, NVIDIA Corporation (NASDAQ:NVDA) is the leader in graphics chips and is acquiring ARM. Lastly, Intel has faced delays in implementing 10 nm manufacturing technologies allowing AMD to launch competitive products.

Intel is undervalued despite the recent run-up in stock price from late October. The stock price is well off its 52-week high. At the current stock price, Intel trades at a forward price-to-earnings ratio of about 10.1X. The multiple in the past decade has been close to 12X, suggesting Intel is undervalued. The combination of market dominance in PCs and servers, scale, balance sheet, a growing dividend, dividend safety, and undervaluation makes Intel a long-term buy, in my opinion.

Disclosure: None.

About the Author

Dividend Power is a self-taught investor and blogger on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, FXMag, and leading personal finance blogs. He works as a part-time freelance equity analyst with a leading newsletter on dividend stocks. He was recently in the top 2% out of over 8,203 financial bloggers as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.

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