What You Must Know About Intel

I know it sounds ludicrous, but investors often overlook the people in charge of protecting their investments. The idea of gauging a company's leadership plays second-fiddle other categories of analysis. However, at Fool.com we believe careful study of effective leadership is one of the most important areas of evaluating long-term winning investments.

We like CEOs who actually work for shareholders like us. After all, we're the true owners of the business. When you're deciding whether to invest in a company, failing to vet its CEO is a big mistake. In fact, if you've overlooked the study of a company's leadership, then that's the one important area you should know about before finalizing your investment in the company.

After reviewing thousands of companies over dozens of years, we've found several crucial characteristics of quality management. Today, we'll size up the recent performance of Intel's leadership.

How much skin do they have in the game?
Are Intel CEO Paul Otellini's interests aligned with shareholders? Here's how the Intel CEO's ownership compares to that of his peers.

CEO, Company

Shares Owned

% of Shares Outstanding

Insider Ownership Market Value (in millions)

Paul Otellini, Intel

812,471

0.01%

$17

John Chambers, Cisco Systems

2,577,601

0.05%

$50

Richard Templeton, Texas Instruments

1,099,655

0.09%

$35

Scott McGregor, Broadcom

379,139

0.07%

$17

Source: Capital IQ, a division of Standard & Poor's.

Otellini actually owns $17 million worth of Intel, or 0.01% of shares outstanding. We prefer seeing CEOs who have a higher ownership in their businesses. This aligns their interests with shareholders. It's worth noting, however, that while we regard high inside ownership as a positive sign, having low inside ownership shouldn't necessarily be a red flag. CEOs may be relatively new, or may have a low percent of shares outstanding, but a high total value of ownership.

How well are they using your money?
Return on equity can help investors determine how adeptly management gets the job done. This metric combines how well management is expanding profitability, managing assets, and using financial leverage, all in one ratio. While return on equity isn't foolproof -- managers can manipulate it with excessive leverage, for example -- it does an excellent job of suggesting how effective managers are, and how well they can generate high returns on investors' capital.

Here's a look at Intel's recent return on equity:

Despite difficult economic conditions, Intel has managed to grow return on equity over its five-year average. That speaks well of management and shows that the company has continued finding ways to increase returns on shareholder capital. Consistently increasing return on equity shows that management is either adept at cutting costs and managing assets, or is moving the company into new high-return areas.

How productive are their workers?
Revenue per employee provides another way to gauge a CEO's effectiveness. If this metric is declining, the company might have a bloated organizational structure, or too many extra employees toiling away at new initiatives that just aren't working out. Either possibility would hint that management isn't effectively running the organization.

Source: Capital IQ, a division of Standard & Poor's.

As you can see, Intel's revenue per employee has increased its five-year average. Rising revenue per employee can be a sign of management better controlling costs or getting better production out of employees. To better see whether management is excelling in this area, let's compare the company to its peer group once again:

Company

2006

2010

Last Year vs. 5-Year Average

Annual Average Change

Intel (Nasdaq: INTC  )

$389

$444

$440

5%

Cisco Systems (Nasdaq: CSCO  )

$646

$568

$551

(6%)

Texas Instruments (NYSE: TXN  )

$350

$460

$423

4%

Broadcom (Nasdaq: BRCM  )

$623

$701

$629

(1%)

Source: Capital IQ, a division of Standard & Poor's. Dollar figures in thousands.

As shown in the chart above, Intel's revenue per employee has not only been rising but is also better than its combined peer group. That's quite the impressive feet and shows that management is finding shrewd ways to control costs and increase the productivity of its works.

In the end, the concern for management is returning capital to shareholders, especially if the company can't adequately find new high-growth areas to invest in. So we're pleased to see that:

  • Dividends have increased by 16.95% annually. The company's current dividend yield stands at 3.37%.
  • The total count of shares outstanding has decreased over the past five years. While CEOs are often tempted with excessively awarding stock options to retain key talent, when done in excess it dilutes current shareholders. If the company's stock isn't overvalued, buying back company shares is a very tax-effective way to return capital to shareholders.

These are just a few of the factors we look for in a company's management. If you can find leaders who continually give shareholders high returns on their capital, and align their interests with yours, you've got a better chance to enjoy market-beating returns for the long haul.

Jeremy Phillips owns no shares of the companies mentioned in this article. Intel is a Motley Fool Inside Value recommendation. The Fool has written calls (bull call spread) on Cisco Systems. The Fool owns shares of and has bought calls on Intel. Motley Fool Options has recommended buying calls on Intel. The Fool owns shares of Texas Instruments. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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